Selective Insurance Group Annual Report 2022

Plain-text annual report

S E L E C T I V E A N N U A L R E P O R T 2 0 2 2 51326_Selective AR Cover 2022 - v2.indd 3 3/10/23 2:03 PM OUR FOOTPRINT Standard Personal (15 states) Standard Commercial (30 states and the District of Columbia, including Idaho, Alabama, and Vermont, which opened in 2022) Flood and Excess & Surplus (50 states) OUR BUSINESS Selective Insurance Group, Inc. (NASDAQ: SIGI) is a New Jersey holding company for ten property and casualty insurance companies with $10.8 billion in assets as of December 31, 2022. A customer-centric company, we are dedicated to serving our customers’ unique insurance needs through customized risk management solutions and value-added services. In collaboration with our distribution partners, we offer standard and specialty insurance to businesses, non-profits, public entitites, and individuals through the following segments: Standard Personal, including Flood Excess & Surplus 10%* 9%* 81%* Standard Commercial *Percent of business based on 2022 net premiums written. OUR YEAR IN REVIEW 12% Growth in net premiums written $232M Net investment income after-tax A+ AM Best financial strength rating 95.1% Combined ratio 9 Consecutive years of double-digit non-GAAP operating return on common equity 12.4% Non-GAAP operating return on common equity^ 8.34 Overall customer satisfaction score (on a 10-point scale) ^ Non-GAAP (U.S. Generally Accepted Accounting Principles) operating income, non-GAAP operating income per diluted common share, and non-GAAP operating return on common equity are non-GAAP measures. Refer to the section entitled “Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures. 2022 FINANCIAL HIGHLIGHTS % or Point Change 2022 2021 Better (Worse) ($ in millions, except per share data) Insurance Operations Net premiums written Combined ratio Underwriting income after-tax Return on common equity from insurance operations after-tax Investments Net investment income after-tax Net realized and unrealized investment (losses) gains after-tax $3,573.6 $3,189.7 95.1% $131.8 5.4% $232.2 $(90.7) 92.8% $172.7 6.5% $263.0 $13.9 Total invested assets $7,837.5 $8,027.0 $3.37 2.9% 9.4% $2.88 3.4% 9.9% $3,558.1 $3,379.2 $215.7 8.8% $306.4 12.4% 22.5% $10,802.3 $2,527.6 $2,327.6 $3.54 $5.03 $1.14 $38.57 $394.5 14.8% $380.6 14.3% 24.2% $10,461.4 $2,982.9 $2,782.9 $6.50 $6.27 $1.03 $46.24 Invested assets per dollar of common stockholders’ equity Annual after-tax yield on investment portfolio Return on common equity from net investment income after-tax Summary Data Total revenues Net income available to common stockholders Return on common equity Non-GAAP operating income* Non-GAAP operating return on common equity* Operating cash ﬂow as % of net premiums written Total assets Stockholders’ equity Common stockholders’ equity Per Common Share Data Diluted net income available to common stockholders Diluted non-GAAP operating income* Dividends to common stockholders Book value AVERAGE ANNUAL RETURN Growth of a $10,000 investment $25,000 $20,000 $15,000 $10,000 (year-end 2017-2022) $5,000 $0 12% 2.3 pts (24)% (1.1) pts (12)% (752)% (2)% 17% (0.5) pts (0.5) pts 5% (45)% (6.0) pts (19)% (1.9) pts (1.7) pts 3% (15)% (16)% (46)% (20)% 11% (17)% SIGI S&P 500 S&P Prop/Cas * Non-GAAP (U.S. Generally Accepted Accounting Principles) operating income, non-GAAP operating income per diluted common share, and non-GAAP operating return on common equity are non-GAAP measures. Refer to the section entitled “Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the ﬁscal year ended December 31, 2022 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures. 2017 2018 2019 2020 2021 2022 SELECTIVE 2022 ANNUAL REPORT 1 51326_Selective AR Wrap 2022 - v2.indd 1 3/9/23 4:37 PM 2022 ANNUAL REPORT SHAREHOLDER LETTER Dear Shareholders: • Continued ﬁnancial ﬂexibility: At year-end 2022, our balance 2022 was a remarkable year for Selective. We demonstrated our resiliency and ability to manage effectively through several macroeconomic challenges. We proudly delivered a superior omni-channel service experience to customers and independent insurance agency partners, opportunities for our employees, and strong results for our shareholders. Our effective execution enabled us to generate a 12.4% non-GAAP operating return on common equity (“ROE”), our ninth consecutive year of delivering double-digit returns. Very few in our industry can match that track record. Despite elevated catastrophe losses, rising inﬂation, and capital market volatility over the past nine years, we delivered annualized total shareholder return of approximately 16%. Over that period, we also generated about 10% annual growth in tangible book value per share plus accumulated dividends, the metric we view as the best long-term indicator of property and casualty industry value creation. Our results reﬂect the success of our underwriting discipline and proﬁtable growth strategies. John J. Marchioni Chairman, President and Chief Executive Officer I ﬁrmly believe we have the tools, technology, talent, and distribution partner relationships to continue generating strong and sustainable performance – regardless of market conditions – in 2023 and well into the future. 2022 FINANCIAL HIGHLIGHTS: • Strong bottom-line performance: Non-GAAP operating ROE of 12.4% outperformed our full-year 2022 operating ROE target of 11% because of our disciplined underwriting strategy. Net income available to common stockholders was $216 million ($3.54 per diluted common share), and non-GAAP operating income was $306 million ($5.03 per diluted common share). sheet remained extremely strong. During the year, we increased our quarterly shareholder dividend by 7%, to $0.30 per share. We also had approximately $84 million in remaining capacity under our Board-authorized $100 million share repurchase program. • Strong share price outperformance: Selective’s 2022 total shareholder return was 9.7%, meaningfully exceeding the S&P 500 Index’s 18.1% decline. Over the past ten years, total annualized shareholder returns of 18.4% have exceeded the S&P 500 Index’s 12.6% average annual performance. HISTORICAL NON-GAAP OPERATING ROEs* RELATIVE TO PEER AVERAGE 15% 12% 9% 6% 3% 0% '15 '16 '17 '18 '19 '20 '21 '22 SIGI Peer Avg. HISTORICAL TOTAL RETURN: SIGI VS. BENCHMARKS (DECEMBER 31, 2022) 25% 20% 15% 10% 5% 0% SIGI S&P Prop/Cas S&P 500 % 2 7 1 . % 7 9 . % 1 . 0 1 % 2 0 1 . % 4 9 . % 4 8 1 . % 8 3 1 . % 6 2 1 . 1 Year 5 Years 10 Years % 1 . 8 1 - * Non-GAAP (U.S. Generally Accepted Accounting Principles) operating income, non-GAAP operating income per diluted common share, and non-GAAP operating return on common equity are non-GAAP measures. Refer to the section entitled “Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the ﬁscal year ended December 31, 2022 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures. 2 51326_Selective AR Wrap 2022 - v2.indd 2 3/9/23 4:37 PM 2022 STRATEGIC AND OPERATING HIGHLIGHTS: • We advanced our geographic expansion strategy by launching our commercial lines products in Vermont, Idaho, and Alabama. We are on target to open West Virginia and Maine as expected in early 2024. Over time, an expanded footprint will enhance our access to new business, further reduce our geographic concentration risk, and help us better serve our customers and distribution partners. • We appointed 118 new agencies, bringing the total to approximately 1,500 agencies and 2,600 storefronts. • We resumed premium growth in our personal lines segment, driven by strong market acceptance of our product designed for mass affluent customers. • We published our inaugural Task Force for Climate-Related Financial Disclosures (TCFD) report, signiﬁcantly enhancing our climate strategy disclosure. EXECUTION OF KEY STRATEGIC PRIORITIES Our strong ﬁnancial performance this past year provides us the ﬁnancial ﬂexibility to continue executing our strategic objectives that support proﬁtable growth over the long term, despite an uncertain near-term macroeconomic backdrop. Maintaining underwriting discipline and pricing adequacy is a top priority. We built the organizational muscle and underwriting focus to effectively manage proﬁtability and retention rates, even in the current dynamic loss-trend environment. Our commitment to underwriting discipline has positioned us well in recent years, permitting us to adjust our go-to-market strategy and prices as necessary. COMMERCIAL LINES PRICING AND RETENTION We continue to develop and implement new tools and technologies to create operating efficiencies and strengthen our market position. Our recent investments to enhance our small business and E&S technology platforms position us well for the future. Our commitment to continuous improvement includes enhancing customers’ experience with Selective at every touchpoint. This is critical to becoming a stronger competitor. We made signiﬁcant investments in digital capabilities that enable our customers to engage in their chosen manner and increase the adoption of our self-service platform and value-added services, all expected to increase future retention. BOARD MEMBER RETIREMENTS As we look ahead to our many opportunities, I want to recognize three long-standing Board members – John C. Burville; Michael J. Morrissey; and William M. Rue – who are retiring at the 2023 Annual Meeting of Stockholders, having reached our mandatory retirement age. Each played an integral role in our success, providing valuable insights and guidance throughout their tenure. We thank them for their strategic counsel and wish them the best. CONCLUSION Our outstanding 2022 performance gives us a solid foundation to advance our near-term strategic priorities and position us for consistent long-term growth and value creation. We could not have accomplished this without all our supporters. I want to thank our shareholders for their investment in our business and strategy and their conﬁdence in our management teams’ continued execution. I’d also like to thank our customers and distribution partners for their continued trust in our operations. Most importantly, I want to thank our talented employees, whose dedication and efforts continue to strengthen our customer and distribution partner relationships and drive our organization. I am conﬁdent their work furthering our unique culture will drive our success in the future. Every day, our interactions with our customers and agency partners reinforce the importance of our role in rebuilding lives and businesses, making communities safer, and supporting economic expansion. We recognize and appreciate our responsibilities to the communities we serve as an employer providing a great place to work, as a safety resource helping mitigate risks, and as a neighbor supporting safe, sustainable, just, and diverse communities. Responsibility empowers our people to be and do their very best. Our 2023 Annual Meeting of Stockholders will be held virtually, allowing attendance from anywhere in the world. We hope you will join us. John J. Marchioni Chairman, President and Chief Executive Officer SELECTIVE 2022 ANNUAL REPORT 3 51326_Selective AR Wrap 2022 - v2.indd 3 3/10/23 10:48 AM UNIQUELY SUPPORTING OUR COMMUNITIES We are committed to understanding and mitigating risk, serving our customers responsibly, and providing timely claims service, while being environmentally aware. Our unique operating model includes regionally based Underwriting, Claims, and Safety Management professionals with technical expertise to service our policyholders, their claimants, and our distribution partners, helping to mitigate exposure to loss before it happens, and restore lives and businesses after an insured loss occurs. Our risk management solutions demonstrate to our customers and distribution partners what it means to Be Uniquely Insured® with Selective. We carefully develop these solutions to address our customers’ needs and seek new, innovative approaches to help them build resilience to, and protect against, risks that could negatively impact their lives and businesses. Value-added products and services help reduce or mitigate risks, such as the removal of personally identiﬁable information from passenger vehicles declared a total loss and availability of award-winning home security monitoring tools. Artiﬁcial intelligence-assisted software helps our Commercial Lines customers identify and adjust high-risk body positions or movements that can lead to severe injuries and costly workers compensation claims. Thermographic infrared surveys for Commercial Lines customers identify potential electrical hazards that could lead to ﬁre risks. Our proactive notiﬁcations, including weather alerts and food, vehicle, and product recalls, help build customers’ awareness and prevent losses. Our sophisticated digital and self-service capabilities provide customers with a seamless omni-channel experience. Over half of our customers use our award-winning MySelective mobile app to report claims, pay bills, access auto insurance cards, and view auto insurance policies on demand. Our 3.8-megawatt DC ground- mount and garage canopy solar photovoltaic facilities at our corporate headquarters are expected to generate approximately ﬁve million kWh of renewable energy annually that we sell to others. We understand that climate change increases the unpredictability of weather-related loss frequency and severity. This poses a long-term risk to our customers’ lives and businesses. We believe it is our corporate responsibility to help mitigate climate change impacts for all stakeholders. In 2022, we published our Task Force on Climate-Related Financial Disclosures report that focuses on four core elements of our climate approach. To read it, please visit www.Selective.com/about-selective/corporate-social-responsibility. 4 51326_Selective AR Wrap 2022 - v2.indd 4 3/9/23 4:37 PM … AND DOING SOCIAL GOOD We are committed to promoting a welcoming culture that celebrates diverse talent, individual identity, different points of view and experiences, and has a positive impact in the communities where we live, work, and serve. 24% Percent of employees who participate in one or more employee resource group (ERG), such as our Black, Military and Veterans (launched in 2022), Pride Alliance, Women in IT, and Working Caregivers ERGs or our Women at Work affinity group. Additional groups are expected to launch in 2023. Items donated by employees to beneﬁt 4,800+ charities that support our neighbors in need, including bicycles built and gifted during the holidays. Hours volunteered by employees to give back to their local community and help make a difference. 4,000+ Approximately $950,000 Donated by the Selective Insurance Group Foundation to charities that help build safe, sustainable, just, and diverse communities. 5,450 Hours committed by employees for diversity and inclusion training to cultivate a culture that embraces, practices, and monitors the attitudes, values, and goals of acceptance; addresses biases; and fosters diverse viewpoints and opinions. 51326_Selective AR Wrap 2022 - v2.indd 5 3/9/23 4:37 PM SELECTIVE 2022 ANNUAL REPORT 5 MANAGEMENT TEAM John J. Marchioni Chairman of the Board, President and Chief Executive Officer Lucinda (Cyndi) Bennett Executive Vice President, Chief Human Resources Officer John P. Bresney Executive Vice President, Chief Information Officer Joseph O. Eppers Executive Vice President, Chief Investment Officer Brenda M. Hall Executive Vice President, Chief Operating Officer, Standard Lines Jeffrey F. Kamrowski Executive Vice President, MUSIC Paul Kush Executive Vice President, Chief Claims Officer Michael H. Lanza Executive Vice President, General Counsel and Chief Compliance Officer Rohit Mull Executive Vice President, Chief Marketing and Innovation Officer Vincent M. Senia Executive Vice President, Chief Actuary Mark A. Wilcox Executive Vice President, Chief Financial Officer 6 51326_Selective AR Wrap 2022 - v2.indd 6 3/9/23 4:37 PM UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______________________to_______________________ Commission file number: 001-33067 SELECTIVE INSURANCE GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) New Jersey (State or Other Jurisdiction of Incorporation or Organization) 22-2168890 (I.R.S. Employer Identification No.) 40 Wantage Avenue, Branchville, New Jersey 07890 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (973) 948-3000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $2 per share Depositary Shares, each representing a 1/1,000th interest in a share of 4.60% Non-Cumulative Preferred Stock, Series B, without par value SIGI SIGIP The Nasdaq Stock Market LLC The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☒ Yes ☐ No ☐ Yes ☒ No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer ☒ ☐ Accelerated filer Smaller reporting company ☐ ☐ Emerging growth company ☐ 1 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No The aggregate market value of the voting company common stock held by non-affiliates of the registrant, based on the closing price on the Nasdaq Global Select Market, was $5,158,579,316 on June 30, 2022. As of January 31, 2023, the registrant had outstanding 60,338,831 shares of common stock. Portions of the registrant’s definitive Proxy Statement for the 2023 Annual Meeting of Stockholders to be held on May 3, 2023, are incorporated by reference into Part III of this report. DOCUMENTS INCORPORATED BY REFERENCE 2 SELECTIVE INSURANCE GROUP, INC. Table of Contents PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Properties Legal Proceedings Mine Safety Disclosures Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Reserved Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Statements Introduction Critical Accounting Policies and Estimates Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020 Results of Operations and Related Information by Segment Federal Income Taxes Liquidity and Capital Resources Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Consolidated Balance Sheets as of December 31, 2022 and 2021 Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020 Notes to Consolidated Financial Statements Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibit and Financial Statement Schedules Item 16. Form 10-K Summary Page No. 4 23 34 35 35 35 35 36 36 36 37 37 45 48 62 62 66 73 75 76 77 78 79 80 133 133 135 135 135 135 135 135 135 136 147 3 PART I Item 1. Business. Overview Selective Insurance Group, Inc. ("Parent") is a New Jersey insurance holding company incorporated in 1977 that owns ten property and casualty insurance subsidiaries ("Insurance Subsidiaries"). The Insurance Subsidiaries sell products and services only in the United States ("U.S.") and exclusively through independent insurance agents and wholesale brokers. Various state departments of insurance (i) license nine of our subsidiaries as admitted carriers to write specific lines of property and casualty insurance in the standard marketplace and (ii) authorize the tenth subsidiary as a non-admitted carrier to write property and casualty insurance in the excess and surplus ("E&S") lines market. We refer throughout this document to the Parent and the Insurance Subsidiaries collectively as "we," "us," or "our," using Parent only to distinguish it from the Insurance Subsidiaries. We also use specific property and casualty industry-related terms defined in a glossary attached as Exhibit 99.1 to this Form 10- K. Our main office is in Branchville, New Jersey. We list our common (stock symbol “SIGI”) and preferred (stock symbol “SIGIP”) stocks on the Nasdaq Global Select Market. In 2022, AM Best Company ("AM Best") ranked us as the 37th largest property and casualty group in its annual "Top 200 U.S. Property/Casualty Writers" list based on 2021 net premiums written ("NPW"). Our current AM Best financial strength rating is "A+" (Superior). Since our founding in 1926, we have a long and successful history in the property and casualty insurance industry. Strategic Advantages We have three key sustainable competitive advantages: • A distribution model that emphasizes franchise value, meaning we focus on appointing and having meaningful, close business relationships with high-quality, independent distribution partners who value our relationships and provide us the opportunity to grow profitably with them; • A unique operating model in which we (i) locate our Standard Commercial Lines underwriting and safety management personnel in the geographic territories they serve, (ii) organize our claims operation regionally by specialty, with local personnel managing our customer, claimant, and agency relationships, and (iii) provide our teams with sophisticated tools and technologies to inform underwriting, pricing, safety management, and claims decisions; and • Our best-in-class employees provide a superior omnichannel customer and agency experience, enhanced by digital platforms and value-added services to increase customer engagement and retention. Several nationally recognized statistical rating organizations ("NRSROs") issue opinions on our financial strength, operating performance, strategic position, and ability to meet policyholder obligations, as follows: NRSRO Financial Strength Rating AM Best Standard & Poor’s Global Ratings ("S&P") Moody’s Investors Services ("Moody’s") Fitch Ratings ("Fitch") A+ A A2 A+ Outlook Stable Stable Stable Stable We believe our AM Best rating has the greatest influence on our ability to write insurance business. Our independent distribution partners recommend insurance carriers based partly on financial strength ratings to limit their potential liability for customer error and omission claims. Similarly, most customers consider ratings in their purchasing decisions because they have loans, mortgages, and other real and personal property security agreements that require they purchase insurance from carriers with minimum rating requirements. 4 These NRSROs also rate our long-term debt creditworthiness. Credit ratings indicate our ability to timely meet our obligations, and they are important factors in our overall funding profile and ability to access certain types of liquidity. Our current senior debt credit ratings are as follows: NRSRO AM Best S&P Moody’s Fitch Credit Rating a- BBB Baa2 BBB+ Long-Term Credit Outlook Stable Stable Stable Stable Our ability to access capital markets is most impacted by our S&P, Moody's, and Fitch financial strength and credit ratings. Segments We have four reportable segments: • • • • Standard Commercial Lines, which represents 77% of Total revenues and 81% of our 2022 total NPW. We sell our Standard Commercial Lines property and casualty insurance products and services to commercial enterprises, typically businesses, non-profit organizations, and local government agencies, primarily in 30 states and the District of Columbia. Our average 2022 Standard Commercial Lines premium per policyholder was approximately $15,300. Standard Personal Lines, which represents 9% of Total revenues and 9% of our 2022 total NPW. We sell our Standard Personal Lines property and casualty insurance products and services primarily to individuals in 15 states. Our average 2022 Standard Personal Lines premium per policyholder was approximately $2,600. Standard Personal Lines includes flood insurance coverage sold in all 50 states and the District of Columbia through the Write Your Own ("WYO") program of the National Flood Insurance Program ("NFIP"). Based on 2021 direct premiums written ("DPW") as reported in the S&P Market Intelligence platform, we are the fourth-largest WYO carrier. E&S Lines, which represents 9% of Total revenues and 10% of 2022 NPW and is sold in all 50 states and the District of Columbia. We sell our E&S Lines property and casualty insurance products and services to commercial customers unable to obtain coverage in the standard marketplace, generally because of unusual or high-risk exposures. E&S insurers are exempt from many standard market requirements, including form and rate regulation. E&S carriers may write an insurance policy if three separate standard line carriers have rejected the risk to be insured. Our average 2022 E&S lines premium per policyholder was approximately $3,800. Investments, which represents 5% (including net realized and unrealized gains and losses) of Total revenues, invests the (i) premiums collected by our Insurance Subsidiaries and (ii) amounts generated through our capital management strategies, including debt and equity securities issuance. We derive nearly all of our income/loss in three ways: • Underwriting income/loss from our insurance operations. DPW, gross premiums, NPW, and net premiums earned (“NPE”) are components of evaluating underwriting income/loss. DPW are what we bill policyholders for insurance coverage and services. Gross premiums are DPW plus premiums assumed from other insurers and mandatory pools and associations. NPW are calculated by subtracting premiums ceded to reinsurers from gross premiums. NPE is NPW recognized as revenue ratably over a policy’s term. Underwriting income/loss is NPE less insurance operations-related expenses. Insurance operations-related expenses fall into three categories on our Consolidated Statements of Income: (i) "Loss and loss expense incurred," which includes losses associated with claims and loss expenses for adjusting claims incurred during a policy's term, net of losses and loss expenses ceded to reinsurers; (ii) "Amortization of deferred policy acquisition costs," which includes expenses related to the successful acquisition of insurance policies, such as commissions to our distribution partners and premium taxes, recognized ratably over a policy's term; and (iii) "Other insurance expenses," which includes acquisition and other insurance-related expenses not otherwise classified as "Loss and loss expense incurred" or "Amortization of deferred policy acquisition costs" incurred in maintaining policies and policyholder dividends. These expenses include, but are not limited to, certain labor expenses, depreciation expense, and policyholder dividends. 5 Total underwriting expenses are the sum of Amortization of deferred policy acquisition costs and Other insurance expenses, offset by Other income on our Consolidated Statements of Income. Other income primarily includes installment fees charged to customers paying their premiums in installments. Net investment income earned from our investment segment. We generate income from investing insurance premiums and amounts generated through our capital management strategies. Net investment income consists primarily of (i) interest earned on fixed income investments and commercial mortgage loans, (ii) dividends earned on equity securities, (iii) income generated from our alternative investments portfolio, partially offset by (iv) investment expenses. Net realized and unrealized gains and losses on investment securities from our investments segment. Net realized and unrealized gains and losses from our investment portfolio result from (i) security disposals through sales, calls, and redemptions, (ii) losses on securities that we intend to sell, (iii) credit loss expense or benefit, and (iv) net unrealized gains and losses on equity securities. • • Net income (or loss) available to common stockholders on our Consolidated Statements of Income also includes (i) corporate expenses, including long-term employee incentive compensation and other general corporate expenses, (ii) interest on our debt obligations, (iii) federal income taxes, and (iv) dividends to preferred stockholders. We use net income (or loss) available to common stockholders and non-U.S. generally accepted accounting principles ("GAAP") operating income as measures of financial performance. Non-GAAP operating income differs from net income available to common stockholders by excluding after-tax net realized and unrealized gains and losses on investments. We use this non-GAAP measure because it is an important financial measure used by us, analysts, and investors because the timing of realized and unrealized investment gains and losses on securities in any given period is largely discretionary. In addition, net realized and unrealized investment gains and losses on investments could distort the analysis of trends. We use the combined ratio as the key performance measure in assessing the underwriting profitability of our insurance operations. The combined ratio is calculated by adding (i) the loss and loss expense ratio, which is the ratio of net loss and loss expense incurred to NPE, (ii) the expense ratio, which is the ratio of underwriting expenses to NPE, and (iii) the dividend ratio, which is the ratio of policyholder dividends to NPE. A combined ratio under 100% indicates an underwriting profit, and one over 100% indicates an underwriting loss. The combined ratio does not reflect net investment income earned, net realized and unrealized investment gains or losses, federal income taxes, interest expense, or corporate expenses. The loss and loss expense ratio typically has the most significant impact on our combined ratio. Key inputs in our loss and loss expense ratio include catastrophe and non-catastrophe property loss and loss expenses incurred, current year casualty loss estimates, and prior year casualty reserve development. We use after-tax net investment income earned as the main measure of our investments segment's financial performance. We also assess total return, calculated as the ratio of the sum of pre-tax (i) net investment income, (ii) net realized and unrealized investment gains or losses (including losses on securities we intend to sell and credit loss expense or benefit) in income, and (iii) unrealized investment gains or losses included in accumulated other comprehensive income or loss, to average invested assets. Our investment philosophy includes setting specific risk and return objectives for the fixed income, equity, and alternative investment portfolios and comparing each to a weighted-average benchmark of comparable indices. Other important measures of our overall financial performance that we consider include return on common equity ("ROE") and non-GAAP operating return on common equity ("non-GAAP operating ROE"). Our basis for using this non-GAAP measure is consistent with our use of non-GAAP operating income described above. ROE is calculated by dividing net income available to common stockholders by average common stockholders' equity. Non-GAAP operating ROE is calculated by dividing non- GAAP operating income available to common stockholders by average common stockholders' equity. We evaluate our segments, in part, based on their contribution to non-GAAP operating ROE. We establish our non-GAAP operating ROE target based on the sum of (i) our current estimated weighted average cost of capital and (ii) an appropriate spread over our estimated weighted average cost of capital. We also consider the current interest rate environment and property and casualty insurance industry market conditions. For 2023, we increased our non-GAAP operating ROE target to 12%, from 11% in 2022, to reflect a higher weighted average cost of capital. For further details about our 2022 results compared to these performance measures, refer to "Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. Other key financial metrics we measure include operating leverage and investment leverage. 6 We define operating leverage as the ratio of NPW to statutory surplus. We target a ratio between 1.35x and 1.55x. Our operating leverage at December 31, 2022 was 1.44x, compared to the U.S. standard commercial and personal lines industry average of approximately 0.8x that Conning, Inc. reported in its Fourth Quarter 2022 Property-Casualty Forecast & Analysis (Source: ©2023 Conning, Inc. Used with permission.). We are comfortable operating our business with operating leverage above the industry average, as we believe we have a lower financial risk profile than the industry, as noted below. Because we write more longer-tail casualty insurance than shorter-tail property insurance, our operating leverage is higher than the industry average. We also operate with higher investment leverage than the industry. We define investment leverage as invested assets per dollar of common stockholders’ equity. Our investment leverage at December 31, 2022 was $3.37, compared to the average invested assets to statutory surplus of $2.27 that Conning, Inc. reported for the U.S. commercial and personal lines in its Fourth Quarter 2022 Property-Casualty Forecast & Analysis (Source: ©2023 Conning, Inc. Used with permission.). To better manage the risks of our higher investment leverage, we have adopted a conservative investment management philosophy, with fixed income securities and short-term investments representing 90% of our invested assets. As of December 31, 2022, our fixed income securities and short-term investments had a weighted average credit rating of "AA-" and an effective duration of 4.1 years, compared to "A+" and 3.9 years as of December 31, 2021. For additional information about our investments segment's design and credit quality characteristics, see "Credit Risk" in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk." and Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. We believe our financial risk profile is lower than the industry because: • Our Standard Commercial Lines segment underwriting risk appetite is focused on small-to-medium sized accounts, with risks weighted more towards low- to medium-hazard than high-hazard. Our average premium per policyholder is approximately $15,300, with about 86% of this segment's casualty lines business having limits of $1 million or less (excluding workers compensation policies, which have no limits), and about 92% of this segment's property lines of business having limits of $3 million or less; • We have sophisticated pricing tools and maintain disciplined financial planning and reserving practices. We conduct quarterly ground-up reserve reviews for most lines of business, with semi-annual reserve reviews by an independent third-party actuary who issues our year-end regulatory actuarial reserve opinions; • We purchase significant levels of reinsurance, including (i) a property catastrophe reinsurance program that limits the net after-tax impact of a 1-in-250 year catastrophe to about 7% of our GAAP equity, and (ii) property and casualty excess of loss reinsurance agreements that limit our retained losses of individual property claims losses to $3 million per risk and casualty claims to $2 million per occurrence; and • We maintain a conservative investment portfolio, with high quality and liquid fixed income and short-term investments, and roughly a 10%-14% allocation to risk assets. Our strong financial strength and lower financial and underwriting risk profile have permitted us to operate with higher operating leverage than most of our industry. This strategy requires us to balance growth and profit, providing us the opportunity to generate higher underwriting and investment portfolio ROEs when profitable. We generate (i) 1.1 points of ROE for each point on the combined ratio and (ii) 2.6 points of ROE for each point of pre-tax investment yield. In 2022, our underwriting and investment income helped generate an 8.8% ROE and a 12.4% non-GAAP operating ROE, with the latter exceeding our 11% ROE target. For further details about our 2022 ROE results, please see "Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. Insurance Operations Overview We generate our insurance operations' revenue by selling insurance policies and services in return for insurance premiums. One-year term policies constitute the vast majority of our sales. Our most significant cost associated with the sale of insurance policies is our loss and loss expense for insured events covered under these policies. Loss and loss expense reserves are one of our critical accounting estimates and represent the ultimate amounts we will need in the future to pay covered claims and related expenses that have not yet been settled or reported. Estimating reserves as of any 7 given date is an inherently uncertain process, requiring estimation techniques and a considerable degree of judgment. We regularly analyze our overall reserve position through internal and external actuarial reserve reviews. For a discussion of our loss reserving process, see "Critical Accounting Policies and Estimates" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. To protect our capital resources and manage the risks associated with our insured risks, we purchase reinsurance from and enter into other risk transfer agreements with third parties. Our insurance subsidiaries transfer risks through an internal reinsurance pooling agreement by which each shares in premiums and losses based on specified percentages. For information regarding our reinsurance treaties and agreements, see "Reinsurance" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. Products and Services Our Insurance Subsidiaries sell insurance that falls into two broad categories: • • Casualty insurance, which generally covers the financial consequences of (i) injuries employees suffer in the course of employment, (ii) third-party bodily injury and/or property damage from an insured's negligent acts, omissions, or legal liabilities, and (iii) our obligation to defend our insured(s) for covered claims. Casualty claims are long-tailed, regularly taking several years to be reported and settled — and even longer in certain situations. Property insurance, which generally covers accidental loss to an insured's real property, personal property, and/or property loss-related earnings. Property claims are usually reported and settled in a relatively short period from the date of loss. The following table shows the principal types of property and casualty insurance policies we underwrite and issue: Types of Policies Commercial Property (including Inland Marine) Commercial Automobile Standard Personal Lines E&S Lines X X X Standard Commercial Lines X X X X X X General Liability (including Excess Liability/Umbrella) Workers Compensation Businessowners' Policy Bonds (Fidelity and Surety) Homeowners Personal Automobile Personal Umbrella Flood1 1The majority of our flood loss exposure relates to our participation in the NFIP's WYO program, to which we cede 100% of our flood insurance premiums and losses. Our Standard Personal Lines segment results include our WYO policies issued to Standard Personal Lines and Standard Commercial Lines customers. X X X X X Category of Insurance Property Property/Casualty Casualty Casualty Property/Casualty Casualty Property/Casualty Property/Casualty Casualty Property Product Development and Pricing Our insurance policies are contracts with our policyholders that specify the losses we cover and the amounts we will pay on a covered claim. We develop our coverages by (i) adopting policy forms created or filed by statistical rating agencies or other third parties, notably Insurance Services Office, Inc. ("ISO"), American Association of Insurance Services, Inc. ("AAIS"), and the National Council on Compensation Insurance, Inc. ("NCCI"), (ii) independently creating our own policy forms, or (iii) modifying third-party policy forms. In developing products and services, we consider market demands, profitability, competitive research, feedback from our independent distribution partners, and the product or service's potential to make our customers' commercial or personal endeavors safer. Our policies provide coverage for future events, so we do not know the actual individual policy loss costs at the time of sale. We consider many variables in determining pricing for coverage. Like most property and casualty insurers, our loss data is not sufficiently credible to independently establish the complex sets of loss costs and rating variables that our products require. Consequently, we often adopt loss costs and rating structures that statistical rating agencies, such as ISO and NCCI, file with state insurance regulators. We typically modify these loss costs or factors based on actuarial analyses of our credible historical statistical data, factoring in loss trends and other expected impacts. We combine the resulting loss costs with expense and profit provisions to develop premium rates. We sometimes supplement the indicated rates with market information to determine our final filed rates. 8 We have developed predictive models for many of our Standard Commercial Lines and Standard Personal Lines. We use these models to refine statistical rating agencies' rating plans or independently develop our own rating plans. Predictive models analyze historical statistical data about various risk characteristics that drive loss experience. For our Standard Commercial Lines, we use the output of these models to group existing or potential policies based on their expected loss potential. These groupings are inputs in the individual risk underwriting and pricing process. We use these models to develop factors in our filed Standard Personal Lines rating plans. The predictive capabilities of our models depend on the quantity and quality of available statistical data, and we may supplement them with other market information or underwriting judgment. Customers and Customer Markets We categorize our Standard Commercial Lines customers into the following strategic business units ("SBUs"): Contractors Mercantile and Services Community and Public Services Manufacturing and Wholesale Bonds Total Standard Commercial Lines Percentage of Standard Commercial Lines 43% 25% 16% 15% 1% 100% Description General contractors and trade contractors Retail, office, lessors risk/property owners, automobile services, and golf courses Public entities, social services, religious institutions, and schools Manufacturers, wholesalers, and distributors Fidelity and surety We do not categorize our Standard Personal Lines or E&S Lines customers into SBUs. No one customer accounts for 10% or more of our insurance operations in the aggregate. We manage our underwriting volatility by focusing on accounts with lower-limits profiles. The following table lists each segment's respective percentage of property and casualty accounts with total insured value and exposure limits of $1 million or less: Standard Commercial Lines Standard Personal Lines Property 76% 76% Casualty 86%1 96% E&S Lines 1Standard Commercial Lines excludes workers compensation policies without statutory policy limits covered by our casualty excess of loss reinsurance treaty, which provides coverage for losses above $2 million. 99% 96% We also purchase significant levels of reinsurance from reinsurers with an average credit rating of "A" or better. Our reinsurance program supports our ability to write accounts with larger policy limits by limiting individual property and casualty retained losses to $3 million per risk for property claims and $2 million per occurrence for casualty claims. For information regarding our reinsurance treaties and agreements, see "Reinsurance" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. Geographic Markets We sell our insurance products and services in the following geographic markets: • • • Standard Commercial Lines products and services are primarily sold in 30 states in the contiguous U.S. and the District of Columbia. Standard Personal Lines products and services are primarily sold in 15 states in the Eastern, Midwestern, and Southwestern regions of the U.S. Flood insurance, reported in this segment, is sold in all 50 states and the District of Columbia. E&S Lines products and services are sold in all 50 states and the District of Columbia. We began writing Standard Commercial Lines business in Vermont in June 2022 and Alabama and Idaho in October 2022. This expansion allows us to issue policies to customers with exposures in these states, permitting us to compete more effectively against nationwide insurers and diversify our portfolio risk. Ultimately, we plan to expand our Standard Commercial Lines footprint to most of the contiguous U.S. 9 We manage and support our business from offices in (i) Branchville, New Jersey, where we have our corporate headquarters, (ii) Farmington, Connecticut, the principal office for investment operations, (iii) Glastonbury, Connecticut, used by several corporate areas, but primarily our information technology ("IT") department, (iv) Richmond, Virginia, the location of our underwriting and claims service center ("USC"), and (v) six regional branches, with locations shown in the following table: Region Heartland New Jersey Northeast Mid-Atlantic Southern West Office Location Indianapolis, Indiana Hamilton, New Jersey Branchville, New Jersey Allentown, Pennsylvania, and Hunt Valley, Maryland Charlotte, North Carolina Scottsdale, Arizona Our E&S Lines have offices in Scottsdale, Arizona and Dresher, Pennsylvania. Our Flood business has offices in Branchville, New Jersey, and Miami, Florida. Our Staff Counsel operation, which defends our policyholders with employee-lawyers, has seven leased offices in the Eastern region of the U.S. Distribution Channel The property and casualty insurance market is highly competitive and regulated, and has fragmented market share, particularly in standard commercial lines. The market has three main distribution methods: (i) sales through appointed independent insurance agents and wholesale brokers; (ii) direct sales to personal and commercial customers, including Internet-based digital platforms; and (iii) sales through captive insurance agents employed by or contracted to sell exclusively for one insurer. By segment, we use the following types of independent distribution partners to sell our insurance products and services: • • • Standard Commercial Lines: Independent retail agents; Standard Personal Lines: Independent retail agents; and E&S Lines: Wholesale general agents. We seek to compensate our distribution partners fairly and consistently with market practices, generally paying them commissions calculated as a percentage of DPW, with supplemental amounts paid based on profitability and considerations for increased premium or policy counts. No one independent distribution partner is responsible for 10% or more of our combined insurance operations' premium. Our top 20 distribution partners generated approximately 40% of our DPW, excluding E&S Lines and the flood line of business, in 2022. Independent Retail Agents and Standard Lines A 2022 Independent Insurance Agents & Brokers of America study estimated there are 40,000 independent property/casualty insurance agents and brokers in the U.S., up 11% from their 2020 study. We expect that independent retail insurance agents — representing most of our independent distribution partners — will remain a significant force in overall insurance industry premium production. Their business model, representing multiple insurance carriers, gives customers a broader choice of insurance products, more competitive pricing, and individualized risk-based consultation. We have approximately 1,500 distribution partners selling our standard lines products and services through approximately 2,600 office locations. About 800 of these distribution partners sell our personal lines products. Approximately 6,300 distribution partners sell our flood insurance products. Wholesale General Agents and E&S Lines We have approximately 80 wholesale general agents, with an aggregated 340 office locations, selling our E&S Lines business. We have granted these wholesale general agents limited binding authority for risks meeting our prescribed underwriting and pricing guidelines. Marketing Our primary marketing strategy is to: • Use an empowered field underwriting model for Standard Commercial Lines to provide our distribution partners with resources near their businesses and our mutual customers. For further discussion on this model, see the "Technology, Innovation, and Operating Model" section below. 10 • • • Develop a distribution model that emphasizes the franchise value of appointment to sell our Insurance Subsidiaries' products and services to the principals and producers of our high-quality independent insurance agency partners. To help our agency partners grow profitability and succeed, we establish meaningful and close business relationships by (i) soliciting, gathering, and acting on their feedback and that of our mutual customers on various topics, including our products and services and brand awareness, (ii) advising them on our new product offerings, and (iii) providing education and development programs focused on producer recruitment, sales training, customer experience enhancement, online marketing, and distribution operations. Develop and carefully monitor annual goals with each distribution partner on (i) the types and mix of risks they place with us, (ii) new business and renewal retention expectations, (iii) customer service and engagement rates, (iv) new business and renewal pricing, and (v) the profitability of the business they place with us. Develop brand recognition and meaningful customer engagement through a data-driven multi-channel marketing strategy focused on delivering a superior customer experience. We expect this integrated marketing and customer engagement approach will position us as a marketplace leader and (i) afford us a dynamic view of the changing marketplace and customer expectations, (ii) provide us insight into unique value-added products and services with the greatest impact on each customer, and (iii) help drive business acquisition and retention, and brand health. Technology, Innovation, and Operating Model We continue to evolve our technology and operating model, maintaining a strong focus on innovation and providing our customers and distribution partners with "around the clock" digital access to account information and transactional capabilities. While many insurers offer digital customer solutions for personal lines, we strive to be a digital and customer experience leader in all three insurance operation segments. Technology We leverage technology in our business and invest significantly in IT platforms, integrated systems, and cloud-based solutions. We make these technology investments to provide: • • • • Our distribution partners with accurate business information and seamless integration with our systems, permitting easy policy transaction processing; Our service representatives with a customer account-centric view of our policyholders, reducing customer inquiry response time and complementing customer access to on-demand digital transactional capabilities; Our underwriters with advanced underwriting and pricing tools and predictive models that provide guidance and automatic retrieval of relevant public information on existing and potential policyholders, enhancing profitability and enabling premium growth; and Our claims adjusters with predictive tools to identify specific claims likely to experience escalating losses, fraud, subrogation opportunities, or litigation. Our digital strategy provides our Standard Commercial Lines and Standard Personal Lines customers with a mobile application and a self-service portal branded MySelective. Our mobile application (i) received Best Mobile App Awards' Platinum Award for "Best Mobile Design" in the summer of 2020, (ii) received the PropertyCasualty360 Insurance Innovators Award in the area of customer experience in 2021, and (iii) was the Gold Stevie Winner in the "Sales and Marketing Mobile Application - New Version" category in 2021. As of December 31, 2022, 50% of our customers registered for MySelective, compared to 47% as of December 31, 2021. MySelective gives policyholders on-demand self-service access to account information, electronic bill payment, and claims reporting. We continue to provide customers with additional digital value-added services, such as proactive messaging about vehicle and product recalls, adverse weather, and claim status. Our primary technology operations are in Branchville, New Jersey, and Glastonbury, Connecticut. We have agreements with multiple consulting, IT, and supplemental staffing service providers to augment our internal resources. Collectively, these providers supply approximately 53% of our skilled technology capacity, with 74% of their resources overseas. We retain management oversight of all projects and ongoing IT production operations. We have procedures to manage an efficient transition to new technology vendors without significantly impacting our operations if we terminate any current service provider. 11 Cybersecurity Our business relies heavily on IT and application systems connected to or accessed from the Internet. This connection increases the risk that a malicious cyber-attack could impact us. Our systems also contain proprietary and confidential information about our operations, employees, agents, and customers and their employees and property, including personally identifiable information. A dedicated unit implements cybersecurity controls and reports on cybersecurity risks. We work with industry- leading security consulting and technology partners and follow security-minded design principles. The cybersecurity team receives oversight and executive support through engagement with our Executive Risk Committee ("ERC"). Similarly, the team works with our Enterprise Risk Management ("ERM") function on business alignment and cybersecurity insurance purchasing. Our cybersecurity program balances responsiveness to rapidly-changing threats with ensuring the long-term health of our IT security environment. It focuses on six key areas: • • • • • • Proactive cybersecurity, including cyber threat hunting, ethical hacking campaigns, and periodic cybersecurity program assessments; Reactive cybersecurity processes that we regularly test using incident response and disaster recovery exercises based on realistic scenarios; Endpoint controls that provide data encryption, threat detection, malicious software defense, and data backups; Identity and access management controls that include multi-factor authentication and additional safeguards for employees with elevated privileges; Employee cyber risk awareness programs that leverage general education, role-based training, and simulated phishing attacks; and Third-party risk management and security standards, including due diligence, continuous monitoring, and cyber risk scoring. We monitor various IT performance and security metrics across these six key areas. The Parent's Board of Directors ("Board") receives regular updates on the strength of our cyber risk control environment, emerging cyber threat issues, and the results of external assessments by outside security consultants. Two of the Board's directors have earned cybersecurity oversight certifications from a corporate directors organization. For further information regarding our risks associated with cyber-attacks, see Item 1A. "Risk Factors." of this Form 10-K. For additional information regarding our ERM function and ERC, see the "Corporate Governance, Sustainability and Social Responsibility" section in Item 1. "Business." of this Form 10-K. Innovation To maintain our culture of innovation and long-term value proposition to our customers and distribution partners, we have the following mechanisms in place: • • • A dedicated innovation team under our Chief Marketing and Innovation Officer. We established this team to (i) apply proven innovation techniques and methods for identifying, prioritizing, and advancing strategic, innovative ideas and opportunities, (ii) stay apprised of critical industry and insurance technology trends that impact our customers, distribution partners, and employees, and (iii) expand our innovation culture by providing training and skill-building opportunities, facilitating departmental and cross-functional strategy and innovation sessions, and leading relevant communities of interest that intersect with the lifecycle of innovation. An innovation lab at our corporate headquarters to spur innovation and further our efforts to identify and deploy product, agency and customer experience, and operational efficiency improvements. We conduct innovation design work (i) in-person, using our innovation lab at our corporate headquarters, (ii) virtually, combining live facilitation with collaboration software and digital whiteboard and polling capabilities, and (iii) utilizing hybrid capabilities, mixing live attendance and digital capabilities at our innovation lab with attendees at remote locations. A Strategic Investment Committee to consider potential investment opportunities, including technology and Insurtech platforms that may positively impact our business or the industry. 12 Operating Model We believe our unique operating model is a competitive advantage. To support and build better and stronger relationships with our independent distribution partners, our (i) Standard Commercial Lines underwriting and safety management personnel are located in the geographic territories they serve, (ii) claims operation is organized regionally by specialty, with local personnel managing our customer, claimant, and distribution partner relationships, and (iii) teams are provided with sophisticated tools and technologies to inform underwriting, pricing, safety management, and claims decisions. Underwriting Process Our underwriting process by segment is as follows: • Standard Commercial Lines: Our Standard Commercial Lines corporate underwriting department oversees our underwriting guidelines and philosophy for each industry segment and line of business. Through formal letters of authority, our Chief Underwriting Officer ("CUO") delegates underwriting authority after assessing an underwriter's job grade, industry, and line of business expertise. Our corporate underwriting department coordinates with our actuarial department to determine adequate pricing levels for all Standard Commercial Lines products. Under the CUO's delegated authorities, our regional underwriting operations make most individual policyholder underwriting and pricing decisions. New business is underwritten by Agency Management Specialists ("AMSs"), with contributions from Production Underwriters, Small Business Teams, and Large Account Underwriters. Renewal business is primarily handled in each region, with support from our USC, which assigns underwriters to specific distribution partners. Our operating model also focuses on improving safety and risk management programs, loss experience, and retention, including: • • • • Risk evaluation and virtual and on-site improvement surveys that evaluate potential exposures and provide solutions for mitigation; Internet-based safety management educational resources, including an extensive library of coverage-specific safety materials, videos, and online courses, such as defensive driving and employee educational safety courses; Thermographic infrared surveys that identify potential electrical hazards; and Occupational Safety and Health Administration construction and general industry certification training. We brand these services as "Safety Management: Solutions for a safer workplace."SM We have 86 Safety Management Specialists ("SMS") in the field supporting our policyholders locally. These specialists regularly interact with current and prospective customers. Their safety enhancement and best practices recommendations reduce our customers' property, liability, and workers compensation risks, including higher profile risks like sexual abuse. Their account- specific analyses let our underwriters better understand our customers' exposures, enhancing our new business and renewal underwriting decisions. Over the past three years, we have embarked on safety management initiatives to proactively service policyholders with notifications and alerts, identify risks and mitigate potential loss occurrence, and provide tools and technologies that improve safety and reduce losses. Examples include: • Vehicle recall notifications to our policyholders and distribution partners; • Weather preparation notices for large storms or hurricanes, including guides on structural improvements, roof and drainage maintenance, and measures to prevent clogged or frozen plumbing; • • Food and product recall notifications to policyholders in food manufacturing, distribution, and preparation; and Customer self-assessments of workplace hazards, with best practices recommendations tailored to the customer's specific risks. 13 In 2022, we continued to expand capabilities in our new Standard Commercial Lines agency interface platform designed to streamline new small business policy quoting and issuance. Writing small business – lower hazard risks in specific industry classes with less than $25,000 in premium – is a core part of our strategy. In recent years, the small business market has become more competitive, with more carriers using technology dedicated to new business generation. We continue to execute a multi-year strategy to (i) improve small business writing ease and speed for our distribution partners and (ii) offer a best-in-class small business customer experience. We enhanced our rating platform's user experience by reducing the amount of information required to be inputted before quote generation. In 2023, we plan to add additional business capabilities to help us maximize new small business growth with our distribution partners. • • Standard Personal Lines: Our Standard Personal Lines underwriting operations are centralized and highly automated. Most new and renewal business is underwritten and priced through an automated system reflecting our filed rates and rules. Exceptions to our internal underwriting guidelines are approved under the direction of our Standard Personal Lines CUO. For long-term growth, we are actively repositioning our Standard Personal Lines business to better serve the mass affluent market, where we believe our strong coverage and servicing capabilities will be more competitive. E&S Lines: Our E&S Relationship and Underwriting Managers focus on marketing our product capabilities to wholesale general agents, training them on underwriting guidelines and automation, and collecting market intelligence from them. In return, our wholesale general agents provide front-line new and renewal underwriting and policy administration services per guidelines we prescribe. Our small commercial E&S underwriters review all requested exceptions or declinations based on individual account risk characteristics. Our middle market E&S commercial underwriters write larger accounts and receive complete submissions for individual account risk characteristics from wholesale general agents, making underwriting and pricing decisions based on them. Wholesale general agents who submit middle market commercial risks do not have the authority to quote or bind accounts on our behalf. Our independent distribution partners designate Standard Commercial Lines and Standard Personal Lines accounts to be serviced by our USC. All USC employees are licensed agents who respond to policyholder inquiries about insurance coverage, billing transactions, and other matters. For the convenience of us handling USC transactions, our distribution partners agree to receive a slightly lower than standard commission on the associated premium. As of December 31, 2022, our USC was servicing NPW of $99.1 million, representing 3% of our total NPW. Claims Management Timely and appropriate investigation of a claim's facts and circumstances in light of our policy's terms, conditions, and exclusions is an essential service we provide to our policyholders, their claimants, and our distribution partners. To address the increasing complexity of coverage evaluation, construction methods, and litigation, we have structured our claims organization to emphasize: • • • • Claims handling by technical areas of expertise, such as auto liability, general liability, property, and workers compensation, with each business line having a specialized claims unit focused on high severity or technically complex losses and litigation; Claims customer managers and agency executives ("CAEs") who are responsible for enhancing the relationship among our policyholders, distribution partners, and claims operation. The CAEs provide a single point-of-contact for our large account customers and distribution partners. They work with our regional underwriters to deliver appropriate claims service, communicate trends, and discuss results and client services; Cost-effective delivery of claims services and control of loss and loss expense. Our Claims Service Center manages our high volume, low severity automobile and property claims, leveraging virtual adjusting tools that provide prompt and efficient service to our customers; and Timely and adequate claims reserving and resolution. We have been executing a multi-year claims system modernization strategy to improve the efficiency of our claims organization's processing ability through improved workflows and enhanced capabilities for our employees, customers, and distribution partners. In 2022, we rolled out a new digital claim intake method for our workers' compensation claims. We are actively testing a new unique digital claim intake method for automobile and property claims. It allows claimants to readily provide more robust information, improving our adjuster assignment and overall claims cycle speeds. 14 Our Special Investigative Unit ("SIU") supports all insurance operations and investigates potential insurance fraud and abuse, consistent with law and direction from regulatory bodies and non-profit organizations dedicated to combating and preventing insurance crime. The SIU adheres to uniform internal procedures to improve detection and act on potentially fraudulent claims. We have developed a proprietary SIU fraud detection model that identifies potential fraud cases early in a claim's life. Our practice (and usually our legal requirement) is to notify the proper authorities of SIU findings. Insurance Operations Competition We face substantial competition in the insurance marketplace from public, private, and mutual insurance companies with varying levels of brand recognition, scale and operational efficiency, capital bases, book of business diversification, and cost of capital. Like us, many competitors rely on independent partners to distribute their products and services. Other insurance carriers either employ their own agents, who represent only them, or use a combination of distribution partners, captive agents, and direct marketing. The property and casualty insurance market is highly competitive in each of our insurance segments, with market share fragmented among many companies, particularly in Standard Commercial Lines and E&S Lines. We compete primarily with regional and national insurers on coverage terms, claims service, customer experience, safety management services, ease of technology usage, price, and financial strength ratings. We also face increased competition from established direct-to-consumer insurers, existing competitors, and new entrants, many with lower cost structures and digital technology with enhanced servicing and customer experience capabilities. Investments Segment Our investment portfolio's objectives are to maximize after-tax net investment income and generate long-term book value per share growth. We maximize the portfolio's overall total return by investing our insurance operation's premiums and the amounts generated through our capital management strategies, including debt and equity security issuances. We balance those objectives against prevailing market conditions, capital preservation considerations, and our enterprise risk-taking appetite. We maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity. Our fixed income securities primarily include corporate, asset-backed, and mortgage-backed securities, and state and local municipal obligations. We also invest in public equity securities, commercial mortgage loans, short-term investments, alternative investments, and other investments. Alternative investments primarily include limited partnership investments in private equity, private credit, and real estate strategies. Other investments include Federal Home Loan Bank ("FHLB") stock and tax credit investments. For further information regarding our risks associated with the overall investment portfolio, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk." and Item 1A. "Risk Factors." of this Form 10-K. For additional information about investments, see the "Investments Segment" section in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." and Note 5. "Investments" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Regulation Primary Oversight by the States in Which We Operate Insurance regulation and taxation is primarily overseen at the state level because of the U.S. Congress's delegation in the McCarran-Ferguson Act. The primary public policy behind insurance regulation is protecting policyholders and claimants over all other constituencies, including shareholders. Property and casualty insurance activities regulated by the states include the following: • • Protection of claimants: Oversight of financial matters to ensure claims-paying ability, including minimum capital; statutory surplus; solvency standards; accounting methods; form and content of statutory financial statements and other reports; loss and loss expense reserves; investments; reinsurance; dividend payments and other distributions to shareholders; security deposits; and periodic financial examinations. Protection of policyholders: Oversight of matters including certificates of authority and other insurance company licenses; licensing and compensation of distribution partners; underwriting criteria; premium rates (required not to be excessive, inadequate, or unfairly discriminatory); policy forms; policy terminations; claims handling and related practices; cybersecurity; data protection and customer privacy; reporting of premium and loss statistical information; periodic market conduct examinations; unfair trade practices; mandatory participation in shared market mechanisms, 15 such as assigned risk pools and reinsurance pools; mandatory participation in state guaranty funds; and mandated continuing workers compensation coverage post-termination of employment. • Protection of policyholders, claimants, and shareholders: Related to our ownership of the Insurance Subsidiaries, oversight of matters including registration of insurance holding company systems in states where we have domiciled insurance subsidiaries, reporting about intra-holding company system developments, self-assessment of current and future risks, including cybersecurity and climate change, and required pre-approval of certain transactions that may materially affect the operations, management, or financial condition of the insurers, including dividends and change in control. NAIC Financial Monitoring Tools Our various state insurance regulators are members of the National Association of Insurance Commissioners ("NAIC"), which has established statutory accounting principles ("SAP") and other accounting reporting formats and model insurance laws and regulations governing insurance companies. An NAIC model statute, however, only becomes law after state legislative enactments, and an NAIC model rule only becomes a regulation after state insurance department promulgation. Adopting specific NAIC model laws and regulations is a condition of the NAIC Financial Regulations Standards and Accreditation Program. This program permits state insurance departments to recognize and rely on the financial examinations and reviews their counterparts conduct, creating efficiencies and limiting overlapping examinations of the same insurance companies. The following are among the NAIC's various financial monitoring tools, most predicated on NAIC model laws and regulations that are material to the regulators in states in which our Insurance Subsidiaries are organized: • • • • • The Insurance Regulatory Information System ("IRIS"). IRIS identifies 13 industry financial ratios and specifies "usual values" for each. Departure from the usual values on four or more financial ratios can lead to inquiries from individual state insurance departments about certain aspects of an insurer's business. Our Insurance Subsidiaries have consistently met most IRIS ratio tests. Risk-Based Capital ("RBC"). RBC is measured by four major areas of risk to which property and casualty insurers are exposed: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Regulators increase their scrutiny, up to and including intervention, as an insurer's total adjusted capital declines below the NAIC required capital level. Based on our 2022 statutory financial statements prepared in accordance with SAP, all our Insurance Subsidiaries had total adjusted capital substantially exceeding the regulatory action levels defined by the NAIC. Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, based closely on the Sarbanes-Oxley Act of 2002, as amended ("Sarbanes-Oxley Act"), regulates (i) auditor independence, (ii) corporate governance, and (iii) internal control over financial reporting. As permitted under the Model Audit Rule, the Audit Committee of our Board serves as the audit committee of each of our Insurance Subsidiaries, even though the Parent is not an insurance entity. Own Risk and Solvency Assessment ("ORSA"). ORSA requires an insurer to maintain a framework for identifying, assessing, monitoring, managing, and reporting "material and relevant risks" associated with the insurers' (or insurance groups') current and future business plans. ORSA, which the state domicile insurance regulators of our Insurance Subsidiaries have adopted, requires an insurer to annually file an internal assessment of the adequacy of its risk management framework and current and projected future solvency position. For more information on our internal process of assessing our significant risks, refer to the "Corporate Governance, Sustainability and Social Responsibility" section below. Group Capital Calculation ("GCC"). In the fourth quarter of 2020, the NAIC adopted the basic structure of the GCC, along with a model law to enable the GCC after state legislative enactment. The calculation provides state insurance regulators with additional analytical information for assessing group risks and capital adequacy, complementing the existing holding company disclosures and analyses. The GCC expands the existing RBC calculation to include (i) capital requirements for other regulated entities in the group, and (ii) defined capital calculations for other group entities that are unregulated. Our New Jersey state insurance regulators adopted the GCC model law in 2022. Based on our 2022 statutory financial statements prepared in accordance with SAP, our GCC ratio exceeds the regulatory action minimum threshold. NRSROs Rating agencies monitor our capital adequacy but are not formal regulators. Two are (i) AM Best, with its Capital Adequacy Ratio ("BCAR"), and (ii) S&P, with its capital model. Both evaluate the strength of an insurer's balance sheet comparing 16 available capital to estimated required capital at various probability or rating levels. BCAR and the S&P model differ from the NAIC financial monitoring tools, particularly RBC. While RBC, BCAR, and the S&P capital model show similar direction as simulation scenarios change, they react differently to variations in economic conditions, underwriting and investment portfolio mix, and capital. We regularly evaluate our capital adequacy relative to each of these capital models to ensure we can effectively pursue our business strategies. Rating agencies also revise and update their capital adequacy models and requirements more frequently than the NAIC updates its financial monitoring tools. Federal Regulation While primarily regulated at the state level, our business is subject to federal laws and regulations, including: • • • • • • • The McCarran-Ferguson Act; The Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"); The NFIP, overseen by the Mitigation Division of the Federal Emergency Management Agency ("FEMA"); The Medicare, Medicaid, and SCHIP Extension Act of 2007, which subjects our workers compensation business to Mandatory Medicare Secondary Payer Reporting; The economic and trade sanctions of the Office of Foreign Assets Control ("OFAC"); Various privacy laws related to possessing personal non-public information, including the following: ◦ ◦ ◦ ◦ Gramm-Leach-Bliley Act; Fair Credit Reporting Act; Drivers Privacy Protection Act; and Health Insurance Portability and Accountability Act. The Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) govern publicly-traded companies and require or permit national stock exchanges or associations, such as the Nasdaq Stock Market LLC, where we list our equity securities, to mandate certain governance practices. The Dodd-Frank Act, enacted in 2010 in response to the 2008 and 2009 financial markets crises, provided for some public company corporate governance reforms and some oversight of the business of insurance, including: • • Establishing the Federal Insurance Office ("FIO") under the U.S. Department of the Treasury; and Granting the Federal Reserve oversight of financial services firms designated as systemically important. The FIO, consistent with its authority under the Dodd-Frank Act (i) negotiated a covered agreement with the European Union that, among other things, impacted reinsurance collateral requirements for foreign reinsurers, and (ii) has been gathering insurance market data. For additional information on the potential impact of regulation and changes in regulation on our business, refer to the regulation risk factor within Item 1A. "Risk Factors." of this Form 10-K. Corporate Governance, Sustainability and Social Responsibility We strive to maintain a high level of ethics and integrity in our business practices. We are committed to understanding and mitigating risk, serving our customers responsibly, enabling our employees’ professional success and work/life balance, and helping the communities in which we live, work, and serve, while being environmentally responsible. Corporate Governance Strong governance, oversight, and transparency are the foundation of our financial and operating success. We have a mature risk culture and governance structure that are cornerstones of our risk management framework, and are designed to enhance the decision making process and strengthen risk-reward evaluations. Our internal control framework follows the Committee of Sponsoring Organizations of the Treadway Commission (COSO) model, deploying three lines of defense: • The first line of defense is the individual business functions that deliberately assume, own, and manage the risk on a daily operational basis. 17 • • The second line of defense is responsible for risk oversight, supporting the first line to understand, monitor, and manage our risk profile through an ERC and dedicated risk team. The third line of defense is our Internal Audit team, which provides separate, objective assurance in assessing the adequacy and effectiveness of our internal control environment with oversight from our Board's Audit Committee. Internal Audit also coordinates risk-based audits, compliance reviews, and other specific initiatives to evaluate and address risk within targeted areas of our business. Our risk governance structure consists of the following major components: Risk Oversight • Executive Committee • Finance Committee • Corporate Governance & Nominating Committee ("CGNC") • Salary & Employee Benefits Committee • Audit Committee Board of Directors 2 STRATEGY SETTING AND ESTABLISHING RISK TOLERANCE Management & Operating Committees • Management Investment Committee ("MIC") Risk Management • Underwriting Committee • Emerging Risk Committee • Enterprise Project Management Office ("EPMO") • Large Claims Committee • Reserve Committee • Executive Risk Committee ("ERC") • Sustainability Committee • Disclosure Committee • Market Security Committee ("MSC") • Supported by individual business units and functional areas. 2 APPETITE AND LIMIT GOVERNANCE Enterprise Risk Management Function Risk Identification & Reporting Board Oversight Our Board's function is one of oversight and guidance. The Board and its committees ("Board Committees") oversee our business performance and management team ("Management"). The Board reviews and discusses Management reports about our performance and significant issues. The majority of our Board is independent. Our Board oversees our ERM process, and all Board Committees oversee risks specific to their areas of supervision and report their activities and findings to the entire Board. Management and Operating Committees Our Chief Executive Officer (“CEO”) directs our business strategy's implementation. Management regularly reports to the Board on significant events, issues, and risks that may materially affect our business or financial performance. A description of each Management committee and our ERM function follows: MIC — Responsible for (i) setting and implementing the investment objectives and asset allocation, (ii) administering investment policies, (iii) selecting qualified external investment managers and advisors, and (iv) monitoring performance, transactions, and specific risk metrics, including ones related to climate change. Our investment team and external investment managers execute our investment strategy and objectives. The MIC meets formally eight times per year, with additional meetings as necessary. Underwriting Committee — Responsible for overseeing authority delegation throughout our underwriting operations and reviewing and making decisions on any underwriting transaction and/or action that is outside of a CUO's authority. This committee meets as appropriate and evaluates a variety of information related to specific accounts presented, including key projected catastrophe modeling metrics when considering a large property account, as well as underwriting and market considerations. Emerging Risk Committee — Responsible for identifying and monitoring new and evolving risk issues that could significantly impact our financial strength, reputation, or long-term strategy. This committee meets quarterly. EPMO — Responsible for the oversight of large-scale projects. Our EPMO framework uses a consistent methodology to review the return on investment for each major capital expenditure (such as IT system purchases). Projects above a certain dollar threshold require Board approval. The EPMO is supported by certified project managers who apply methodologies to (i) communicate project management standards, (ii) provide project management training and tools, (iii) manage projects, (iv) 18 review project status, including external and internal costs and any associated projected financial benefits, and (v) provide non- technology project management consulting services to the rest of the organization. The EPMO, which includes senior management representatives from all primary business and corporate areas, meets regularly to review all significant initiatives and receives status reports on other projects. The EPMO is an important factor in the success of our business strategy and technology implementations. The EPMO meets monthly and as needed. Large Claims Committee — Responsible for the oversight of claims that: (i) have or are likely to exceed a reinsurance policy coverage limit; (ii) have a bad faith exposure of $15 million or more; (iii) are likely to generate significant bad publicity; or (iv) potentially create a significant legal precedent on an insurance coverage issue. The Large Claims Committee also approves reserves and payments for claims over the Chief Claim Officer’s authority. This committee meets on an as-needed basis. Reserve Committee — Responsible for monitoring loss and loss expense reserve levels and taking management actions regarding financial recording of reserves. The reserve committee meets quarterly. ERC — Responsible for the holistic evaluation and supervision of our risk profile, and determining future risk management actions supporting our overall risk profile. The ERC provides management oversight of our ERM function. The ERC relies on several management committees to analyze and manage specific major risks, including the Emerging Risk Committee and the Underwriting Committee. At least quarterly, the ERC meets to review and discuss various topics and the interrelation of our significant risks, including, without limitation, capital modeling results, capital adequacy, risk metrics, emerging risks, and sensitivity analysis. Sustainability Committee — Reports to senior management on significant public issues relating to sustainability. It also develops or opines on ESG-related policies and procedures. The committee meets quarterly. Disclosure Committee — Responsible for establishing and implementing procedures to ensure compliance with Regulation FD and other applicable securities laws. This committee meets at least two times every quarter. MSC — Responsible for reinsurance purchase decisions, approval of individual reinsurers on our panel, reinsurer counterparty risk, and monitoring catastrophe risk. The MSC is comprised of executives and senior leaders with diverse financial and underwriting expertise. The MSC meets at least twice a year before each major treaty renewal. ERM Function The ERM unit is responsible for identifying, measuring, monitoring, and reporting key and aggregated enterprise-wide risks to the ERC and the Board. The ERM unit works with other functional areas to develop appropriate responses to identified risks and supports the successful execution of our business strategy. We rely on quantitative and qualitative tools to identify, prioritize, and manage our major risks, including proprietary and third- party computer modeling and other analyses. When appropriate, we engage subject matter experts, such as external actuaries, third-party risk modeling firms, and IT and cybersecurity consultants. Our Insurance Subsidiaries annually file with their domiciliary regulators an ORSA report, an internal solvency assessment developed by the Chief Risk Officer ("CRO") in coordination with the ERC and reviewed by our Board. We categorize our major risks into five broad categories: • • • • Asset risk, stemming primarily from our investment portfolio and reinsurance recoverables and includes credit and market risk; Underwriting risk, which is the risk our insured losses exceed our expectations, including: ◦ ◦ ◦ Losses from inadequate loss reserves; Larger than expected non-catastrophe current accident year losses; and Catastrophe losses that exceed our expectations or our reinsurance treaty limits. Liquidity risk, which is the risk we will be unable to meet our contractual obligations as they become due because we cannot liquidate assets or obtain adequate funding without incurring unacceptable investment losses or borrowing expenses; Other risks, which include a broad range of operational risks, many challenging to quantify, such as talent/human capital, market conditions, economic, legal, regulatory, reputational, and strategic risks – as well as the risks of fraud, 19 human failure, modeling risks, inadequate business continuity plans, or failure of controls or systems, including cybersecurity risk; and • Emerging risks, which include risks in the other categories that are new, rapidly evolving, or increasing substantially compared to historical levels. For example, we consider (i) heightened levels of economic inflation, (ii) the enactment of reviver statutes for abuse victims, (iii) climate change, (iv) the increased threat of cyber incidents, and (v) the significant economic impacts from the ongoing Russian war against Ukraine and the economic and societal impacts of the COVID-19 pandemic, including disrupted supply chains and products, services, and labor shortages, and other emerging risk. The table below maps our management and operating committees to their responsibilities for our five major risks. Major Risk Category Asset Risk Underwriting Risk Liquidity Risk Other Risks Emerging Risks Emerging Risk Committee MIC X X MSC X X X X Disclosure Committee EPMO Reserve Committee X X X Large Claims Committe e X X ERC X X X X X Underwriting Committee Sustainability Committee X X X Our risk governance structure facilitates effective risk conversations across all levels and disciplines of the organization and promotes strong risk management practices. All our strategies and controls, however, have inherent limitations. We cannot be certain that an event or series of unanticipated events will (i) occur or not occur, and generate losses greater than we expect, and (ii) have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. An investor should carefully consider the risks and all other information included in Item 1A. "Risk Factors.", Item 7A. "Quantitative and Qualitative Disclosures About Market Risk.", and Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Sustainability and Social Responsibility Our sustainability and social responsibility initiatives are focused on (i) developing our human capital to create a highly engaged and diverse team of employees and leaders who will guide us into the future, (ii) helping us understand and attempt to mitigate the environmental impact that climate change has on our business and operations, and (iii) providing customers with empathetic claims service and risk mitigation solutions. Human Capital We recognize that developing and protecting our human capital, and providing a mutually beneficial employee experience, complements and contributes to superior longer-term financial performance. We are committed to maintaining a safe and inclusive workplace that promotes diversity and provides attractive benefits to our approximately 2,520 employees. In 2022, we were (i) designated as a Great Place to Work CertifiedTM organization for the third year in a row, (ii) recognized by DiversityJobs as one of their top employers showing continual dedication and commitment to establishing a diverse workforce and culture, and (iii) recognized by Forbes as one of "America's Best Mid-Size Employers." Physical, Social, and Financial Well-Being of our Employees We invest significantly in our employees' physical, social, and financial well-being, which is essential to attracting and retaining the best talent. We are committed to fair pay and regularly analyze and adjust compensation to ensure internal equity and external market alignment. We offer competitive financial benefit programs to support the financial well-being of our employees and their families. Among the offerings are a 401(k) plan with non-elective and employer matching contributions, an employee stock purchase plan allowing discounted stock purchases, and tuition reimbursement and student loan repayment. Most employees are eligible to participate in our annual cash incentive program, funded and paid based on the achievement of our financial and strategic objectives. Employees above certain levels are eligible to participate in our long-term stock-based incentive compensation program. We also offer a wide range of competitive and convenient health and wellness programs. To support our employees' social well-being, we encourage connections with their colleagues and communities through various programs, such as paid time off for volunteer work and matching charitable donations. Talent Development and Employee Retention We invest significant time and resources in (i) training and development to assist our employees in fulfilling their professional potential and having rewarding careers, and (ii) efforts to retain our best talent and foster a positive work-life balance. We are committed to ongoing employee learning, personal growth, and continuous improvement. Our employees have access to 20 various live instructor-led training courses and over 26,000 online skills training courses and resources. We also have leadership and talent development programs and initiatives at all levels of the organization. Examples include our (i) Next Generation of Leaders program, which identifies early- and mid-career management for focused development opportunities that prepare them for future senior leadership, (ii) RISE (Retain Include Support Engage) program, which is an accelerated professional development program for diverse individual contributors interested in first-level management positions, and (iii) our Ignite College Internship and Momentum Trainee programs, which provide collaboration and cross-functional events and experiences for interns and early-career employees. Of our 2,520 employees at December 31, 2022, 980 are normally home-based; 840 are in our regional offices; and the remainder are in our corporate office. Our Flexible Work Location Policy permits most office-based employees to work remotely 60% of the time. Our employee turnover rate in 2022 was approximately 15%. Employees with over 20 years of service represented approximately 16% of our workforce. Diversity, Equity, and Inclusion We recognize that collaboration by employees with diverse backgrounds, ideas, and experiences can foster innovation, improving operational performance, product and service development, customer experience, market opportunities, and revenue. We have initiatives to increase representation and cultivate greater inclusion of people with different ethnicity, race, age, sexual orientation, gender identities and expressions, and socio-economic backgrounds. Recent initiatives include (i) increasing gender and racial diversity through our Next Generation of Leaders program, (ii) sponsoring various employee resource groups for women, Black, LGBTQ+, and military and veteran employees, (iii) introducing a professional development program focused on under-represented groups, (iv) implementing business objectives tied to supporting and participating in diversity, equity, and inclusion initiatives, (v) enhanced hiring, retention, and promotion practices intended to increase diversity at all organizational levels, including expanding university recruiting efforts to include historically Black colleges and universities, (vi) partnering with the National African American Insurance Association for services and employee programming for our employee's use, and (vii) adding new directors with diverse backgrounds, skills, experience, ethnicity, and race to our Board. As of December 31, 2022, women represented 58% of our non-officer workforce and 33% of our officer workforce, compared to 58% and 32% at December, 31, 2021, respectively. Increasing the representation of women in first-level, middle, and senior management roles is a prioritized goal. Our ethnic diversity for officers and non-officers is consistent with the national average for financial services, but our objective is to increase this representation over time. Approximately 78% of our workforce was White at year-end 2022, compared to 80% at year-end 2021, and 22% were a combination of Black, Latin, Asian, and all other ethnicities combined, compared to 20% at December, 31, 2021. We have a diverse board, with five directors on our Board identifying as part of one or more underrepresented groups. Environmental As a property and casualty insurance company, we understand that climate change creates greater unpredictability of weather- related loss frequency and severity. This poses a long-term risk to the lives and livelihoods of our customers and our business. Our efforts to help address climate change and its associated impacts are centered on (i) prudent oversight and management of catastrophe risk exposure, (ii) helping our customers through responsive claims handling, safety management, and proactive weather alerts, (iii) allocating capital away from specific environmentally hazardous classes through underwriting and investment initiatives, and (iv) reducing our carbon footprint. Understanding and helping mitigate climate change perils for our business and customers is core to our operations and strategy. We believe these efforts (i) contribute to our corporate responsibility to help mitigate the impact of climate change, and (ii) will reward our shareholders with sustained superior financial and operating performance over time. The Emerging Risk Committee identified climate change as a high-level emerging risk that it reviews at least quarterly with the ERC and our Board. The ERM unit, the ERC, and Management stay informed on key climate change risk developments through industry publications, webinars, conferences, and regular engagement with outside sources, such as our reinsurance brokers, investment managers, and trade associations. Responsibility for measurement, assessment, and monitoring the mitigation of the physical risks and transition risks due to climate change resides with our ERM function. Physical risks arise from the changing frequency, severity, and characteristics of acute events, such as hurricanes, floods, and wildfires. These risks can directly affect our underwriting results, impact the long-term viability of certain business lines we write, and potentially impact our investment portfolio. Transition risks arise from society’s transition towards a low-carbon economy, driven by policy and regulations, low-carbon technology advancement, and shifting sentiment and societal preferences. Due to our business risk profile and geographic concentration in the Northeast and Mid-Atlantic states, hurricane peril is our most significant natural catastrophe exposure, driving the “tail” of our modeled catastrophe loss distribution. This risk has 21 influenced our decision to geographically diversify our underwriting portfolio and set rigorous coastal property exposure guidelines. In addition to managing our peak hurricane exposure risk, we seek to manage our exposures to other perils, such as severe convective storms, winter storms, flooding, and wildfires. We do not write crop insurance, have minimal exposure to private flood, and have a small geographic footprint in the Western U.S., so our exposures to certain weather-related perils, such as droughts, wildfires, and flooding, tend to be relatively modest. We monitor our investment exposure to carbon- intensive industries as a measure of our vulnerability to climate-related risks involved with the transition to a low-carbon economy. The ERM unit evaluates our catastrophe risk exposure relative to our established tolerances. This evaluation incorporates the results of third-party vendor models and proprietary analysis in its review of exposure to hurricane and other perils on both a gross and net basis. For quantitative information on the modeled results of our underwriting property portfolio by peril, refer to the "Reinsurance" section in "Results of Operations and Related Information by Segment" of Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Managing Climate-related Risks For information regarding our risks associated with climate change, refer to risks identified with the symbol " "Risk Factors." of this Form 10-K. " in Item 1A. Insurance Operations In managing our insurance operations' physical climate-related risks, we model our property portfolio for hurricanes and other wind events semi-annually in July and January. Wildfire risk, which presents significantly lower exposure for our portfolio, is modeled annually in July. For some time, we have not underwritten specific environmentally-hazardous risks related to production from coal mines, thermal coal plants, or oil sands extraction because they are outside our underwriting appetite. Our underwriting controls employ authority levels in writing large individual property risks and large property accounts that could create or exacerbate a property aggregation issue. If any individual location exceeds the CUO's property limit authority, it must be approved by the Underwriting Committee, comprised of the Standard Lines Chief Operating Officer, CFO, Commercial Lines CUO, Executive Vice President of E&S Lines, and CRO. When considering large property accounts, the Underwriting Committee typically reviews an evaluation of property aggregations in the particular county and state, and projections of marginal impact on our aggregate modeled losses assuming we wrote the risk. The discussion covers our catastrophe risk aggregation appetite and the appropriate pricing for taking the increased risk aggregation. Our established catastrophic risk tolerance requires that no more than 10% of stockholders’ equity is exposed to a loss from a hurricane event at a 99.6% confidence level (1-in-250 year event or 0.4% probability) on a net of reinsurance and after-tax basis. For additional quantitative and qualitative information about our modeled results by scenario on stockholders' equity, refer to the "Reinsurance" section in "Results of Operations and Related Information by Segment" of Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." We believe that we have created an effective control environment for managing natural catastrophe risk on a gross exposure basis by (i) setting overall portfolio growth expectations, (ii) monitoring actual results and property aggregations, (iii) having appropriate underwriting authority controls around our largest accounts, and (iv) consistently focusing on appropriate pricing of catastrophe risk. Investments We are beginning to incorporate ESG considerations into our investment process. To establish appropriate ESG investment governance, we maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity. In addition, we are working with our third-party investment managers to ensure they incorporate ESG guidelines and protocols into their investment process while managing our mandates. Our investment strategy considers climate change risk by prohibiting any new direct equity or debt investments in thermal coal enterprises, including those generating 30% or more of their (i) revenue from the ownership, exploration, mining, or refining of thermal coal, or (ii) electricity generation from thermal coal. We believe that as we transition to a low-carbon economy, the value of these assets could be at greater risk. Other In addition to mitigating insurance operations and investment risk, we: • Have robust plans to ensure operational continuity if we suffer unforeseen or catastrophic events. We have business continuity plans for our key data processing facility (Disaster Recovery Plan), the leadership team (Executive Crisis 22 Management Plan), and significant operational areas. We review and update these plans at least annually, the same as other testing, including “tabletop” exercises and planned hands-on tests. • • Track our Scope 1 and Scope 2 carbon (“CO2”) emissions; however, as an insurance holding company, we are not a meaningful greenhouse gas ("GHG") emitter relative to entities in many other industries. Our Scope 1 emissions include consumption of natural gas, diesel, refrigerant, and fuel usage under our Fleet program, and our Scope 2 emissions comprise our electricity usage. Built ground-mount and garage-canopy solar photovoltaic facilities at our corporate headquarters. The facilities are expected to generate approximately five million kWh of electricity annually, and we sell the solar renewable energy credits to others. Since we sell these solar renewable energy credits, our renewable energy production does not reduce our GHG emissions, however, they do contribute to the production of cleaner energy. Ongoing Initiatives Our objective is to continue to reduce our carbon emissions over the long term. We have many initiatives that we expect will reduce GHG emissions over time. Some include: • Upgrades to our corporate headquarters building management system, which should reduce heating and cooling natural gas consumption; Transitioning our Fleet from gasoline to hybrid vehicles over the next three to five years; Conversion of all corporate headquarters light bulbs to LED; Hybrid work schedule going forward; and • • • • Migration of our information technology systems from our corporate headquarters' data center to the cloud. We have also implemented several initiatives at our corporate headquarters to lower our environmental impact, including: • • • • • • Enhanced waste management and recycling; Repurposing commingled recyclables; Installed electric vehicle charging stations for employee use; Elimination of Styrofoam products in our cafeteria; Recycling and more efficient energy use of electronic equipment; and Reducing our water usage through automatic plumbing features. Reports to Security Holders We file with the U.S. Securities and Exchange Commission ("SEC") all required disclosures, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and any amendments to these reports that we file or furnish pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, which are accessible on the SEC's website, www.SEC.gov. These filings are also available at www.Selective.com shortly after filing such material with the SEC. Our website and the information contained or linked in it are not part of this Annual Report. Item 1A. Risk Factors. Certain risk factors can significantly impact our business, liquidity, capital resources, results of operations, financial condition, and debt ratings. These risk factors might affect, alter, or change actions we might take to execute our long-term capital strategy. Examples include, without limitation, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing our existing debt and/or equity securities, or increasing or decreasing common stockholders' dividends. We operate in a continually changing business environment, and new risk factors emerge from time to time. Consequently, we can neither predict such new risk factors nor assess their potential future impact on our business, if any. Risks Related to our Insurance Operations We are subject to losses from catastrophic events. Losses from natural and human-made catastrophes can negatively impact our financial results. Examples include, without limitation, hurricanes, tornadoes, windstorms, earthquakes, hail, severe convective storms, severe winter weather, derechos, floods, and fires, some related to climate change, and criminal and terrorist acts, including cyber-attacks, civil unrest, and explosions. The frequency and severity of these catastrophes are inherently unpredictable, and the frequency and severity of catastrophe losses have increased globally in recent years. Although we use sophisticated catastrophe modeling techniques to 23 manage our catastrophe exposure, catastrophe models provide estimates, and actual exposure and loss experience may materially differ. For example, catastrophe models did not fully estimate the potential for some recent catastrophe loss activity (such as Hurricane Ida-related severe flooding in the Mid-Atlantic and Northeast in 2021 and Winter Storm Elliott freeze losses in December 2022) and the concurrent recent economic inflation on construction costs. Unmodeled or under-modeled catastrophe risks could result in understated catastrophe exposure, and our actual catastrophe losses could be higher. Our insurance operations primarily write risks in the Eastern, Midwestern, and Southwestern regions of the U.S. Our most significant natural and/or human-made catastrophe exposures are (i) hurricanes impacting the Eastern U.S., (ii) severe convective storms, including hailstorms and tornadoes, (iii) winter storms, (iv) earthquakes, and (v) terrorism events. Single storms could adversely impact our financial results, but it is also possible that we could experience more than one severe catastrophic event in any given calendar year. We track our severe weather and catastrophe losses using definitions and information we obtain from ISO’s Property Claim Services unit, an internationally recognized authority on insured property losses from catastrophes in the U.S., Puerto Rico, and the U.S. Virgin Islands. Certain factors can impact our estimates of ultimate costs for natural and/or human-made catastrophes, including: • • • • • Inability to access portions of the affected areas after a catastrophic event; Scarcity of necessary labor and materials that delay repairs and increase our loss costs; Regulatory uncertainties, including new or expanded interpretations of coverage; Residual market assessment-related increases in our catastrophe losses; Potential fraud and inflated repair costs, partly driven by (a) demand surge post-event, and (b) opportunistic service providers; Higher loss adjustment expenses due to shortages of claims adjusters available to appraise damage; Late claims reporting; Escalation of business interruption costs due to infrastructure disruption; and • • • • Whether the U.S. Secretary of the Treasury certifies an event as a terrorist act under TRIPRA. Natural catastrophes Temperature changes can impact weather patterns and the frequency and/or severity of catastrophes, including hurricanes, severe convective storms, wildfires, and flooding — all of which could cause our catastrophe losses to increase relative to historical levels. The United Nation’s Intergovernmental Panel on Climate Change ("IPCC") is an international body responsible for assessing climate change science. In 2021, the IPCC estimated in its “Sixth Assessment Report: Physical Science Basis” that human activities (i) have caused approximately 1.1°C of global warming to date above pre-industrial levels and (ii) this could rise to an increase between 1.2°C and 3.0°C above pre-industrial levels between 2041 and 2060. Climate change models also project significant differences in global regional warming above pre-industrial levels, depending on future levels of climate mitigation and geographic location. These global regional differences, whether attributable to nature or human activities, include increases in (i) mean temperature in most land and ocean regions, (ii) hot extremes in most inhabited regions, (iii) heavy precipitation in several regions, and (iv) the probability of drought and precipitation deficits in some regions. Human-made catastrophes Cybersecurity The risk of a wide-scale criminal or terrorist cyber-attack has become more significant and has drawn increased attention from IT and national security experts, U.S. policymakers, the U.S. military, and the insurance industry. There is general recognition that a wide-scale cyber-attack that simultaneously impacts multiple victims is more likely, and insurance industry systemic risk has increased. We have identified three primary sources of potential insured exposure to cyber losses: (i) cyber-specific policies designed to cover both first-party and third-party losses; (ii) affirmative cyber coverage grants included in other types of policies, such as commercial property or businessowners policies; and (iii) "silent cyber" exposures, otherwise known as non-affirmative cyber exposures, which describes cyber risk that is neither expressly covered nor excluded in insurance policies. This exposure may exist if courts, regardless of intent, interpret policy forms without specific related coverage exclusions to provide coverage for a cyber-related incident. We provide cyber-specific policies to our commercial lines and personal lines customers through 100% reinsured solutions with highly-rated specialty cyber markets. These solutions allow us to meet our customers' needs for cyber insurance while mitigating our underwriting risk, as we develop our expertise in the cyber insurance market. 24 Beyond our cyber-specific policies, our other insurance policies provide some first- and third-party cyber coverages: • We offer limited first-party affirmative cyber coverage in our commercial property and businessowners' policy forms. • We limited our "silent cyber" exposure through an affirmative coverage grant subject to a sub-limit. Our base property forms typically include a coverage grant of $2,000 or $10,000. Most of our property policies also contain an affirmative endorsement providing "virus and harmful code" coverage subject to a sub-limit. Over 90% of our policies with virus/harmful code coverage on commercial property, businessowners', commercial output policy, or inland marine forms have sub-limits of $25,000 or lower. For policies effective October 1, 2022, we implemented cyber incident exclusions that exclude malicious cyber except for the sub-limited coverage provided in the base ISO coverage forms and our property and businessowners' property “virus and harmful code” extension endorsements. These exclusions clarify coverage and have no premium impact. • Most of our general liability and businessowners' policies specifically exclude cyber-related liability losses, except for "bodily injury." Our specific cyber-exclusion and liability forms' lack of affirmative sub-limited cyber coverage, effectively limit most "silent cyber" exposure. However, any related potential exposures are subject to our casualty reinsurance program, which has no cyber-related loss exclusion. By statute, workers compensation policies do not have cyber exclusions, and a cyber-attack-related workplace injury could trigger coverage. • Terrorism We are required to participate in TRIPRA, now extended to December 31, 2027, for our Standard Commercial Lines and E&S Lines business. TRIPRA rescinded all previously approved coverage exclusions for terrorism and requires private insurers and the U.S. government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, each participating insurer is responsible for paying a significant deductible of specified losses before federal assistance is available. Our $480 million deductible is based on a percentage of our prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2023, the federal government will pay 80% of losses above the deductible, with the insurer retaining 20%. Although TRIPRA will mitigate some of our loss exposure to a large-scale terrorist attack, our deductible could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. If the U.S. Secretary of the Treasury does not certify specific terrorist events (as occurred with the 2013 Boston Marathon bombing and the 2015 San Bernardino shootings), we could be required to pay terrorism-related covered losses without TRIPRA's risk-sharing benefits. We also could be required to pay terrorism-related losses for customers who declined terrorism coverage. Our primary workers compensation policies are required to cover terrorism risk, so TRIPRA applies to those policies. Insureds with non-workers compensation commercial policies can accept or decline our terrorism coverage or negotiate with us for other terms. In 2022, 85% of our Standard Commercial Lines non-workers compensation policyholders purchased terrorism coverage that included nuclear, biological, chemical, and radioactive ("NBCR") events. TRIPRA also applies to cyber liability insurance policies reported under a Terrorism Risk Insurance Program-eligible line of insurance. Many states mandate that commercial property policies cover fire following an act of terrorism - regardless of whether the insured purchased terrorism coverage. We also sometimes elect to provide terrorism coverage for lines of business not included in TRIPRA, such as Commercial Automobile. TRIPRA has never covered personal lines of business. Our Standard Personal Lines homeowner policies exclude nuclear losses but not biological, chemical, or conventional terrorism losses. Our current reinsurance programs cover some losses from conventional foreign and domestic terrorism acts but not NBCR events. An increase in natural or man-made catastrophe losses, including a systemic cyber-attack that produces an aggregation of property and/or casualty cyber losses, will reduce our net income and stockholders’ equity and could have a material adverse effect on our liquidity, financial strength, and debt ratings. The closer a catastrophe occurs to the end of a reporting period, the more likely we have limited information to estimate loss and loss expense reserves, increasing the uncertainty of our estimates. More detailed claims information available after a reporting period may result in reserve changes in subsequent periods. Our loss and loss expense reserves may not adequately cover actual losses and expenses. We maintain reserves for our estimated liability for loss and loss expense associated with reported and unreported insurance claims. Estimating loss and loss expense reserves is inherently uncertain, and there is no method for precisely estimating the ultimate liability for the settlement of claims. We base our loss and loss expense reserve estimates on our internal comprehensive reserve review, which uses our own loss experience, claims payment and reporting patterns, and our view of underlying claims frequency and severity trends. We supplement the estimates with other subjective considerations, including projected impacts from economic, political, social, and legal developments or trends, such as inflation, continually evolving trends driven by the post-COVID-19 pandemic environment, judicial trends and tort decisions, and various state legislative 25 initiatives. We cannot predict the timing or impact of these developments or trends with certainty, and we cannot be sure the reserves we establish are adequate or will be so in the future. We review our reserve position quarterly and adjust the reserve position accordingly. An increase in reserves (i) reduces net income and stockholders' equity, and (ii) could have a material adverse effect on our liquidity, financial strength, and debt ratings. As we underwrite new business and renew existing business, we estimate future loss cost trends in pricing our products to generate an adequate risk-adjusted return. If our future loss cost trend estimates prove to be understated, our pricing of future new and renewal business could be inadequate to cover actual loss costs, and our future loss and loss expense reserves could be understated. Two examples of how loss and loss expense reserves might be affected by economic, political, social, or legal developments or trends are: • • If inflation, including medical and social inflation, is higher than our assumptions, our loss and loss expense reserves for our longer tail lines of business could be insufficient. For example, 2022 inflation rates reflected in the overall consumer price index ("CPI"), the Core CPI, and the Producer Price Index, were higher than 2021. We, however, do not know how long elevated inflation will persist. Our workers compensation line of business is particularly susceptible to inflation because of its extended payment pattern and exposure to medical care services and commodities. While relatively less affected by recent rising inflation rates, these medical care costs could have a more material impact on our overall loss and loss expense reserves if they were to rise significantly or persist for an extended period. Our short-tail property lines of business are also susceptible to inflation because of their exposure to increased labor and material costs. Various states have expanded or could expand the statute of limitations for civil actions alleging sexual abuse. By retroactively permitting previously time-barred claims, these "reviver" laws may result in insurance claims that could significantly increase loss costs and require a re-evaluation of previously-established reserves or the creation of new reserves. Since reviver statutes have been enacted, we have received some notices of claims or potential claims for acts alleged to have occurred, some dating as far back as the 1950s. Without prior experience, we cannot estimate how many "reviver" claims notices we may receive. Most notices (i) are blanket notices sent by attorneys representing claimants unsure of the alleged assailant or supervising entity's insurer or policy (if any) and (ii) may not implicate any of our or a predecessor's insurance policies. For those we determine implicate one of our or a predecessor's policy, we (i) have investigated or are investigating facts, (ii) have evaluated policy terms, (iii) believe we have appropriate coverage defenses to most of these claims and/or sufficient reinsurance protections, and (iv) have considered these factors in establishing our reserves, which we believe provide a reasonable estimate of the aggregate ultimate net exposure for these claims. Our coverage positions may be challenged through litigation or otherwise, so we face litigation risks. These are discussed further below in the Risk Factor entitled, "We are engaged in ordinary routine legal proceedings incidental to our insurance operations that, because litigation outcomes are inherently unpredictable, could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods." For further discussion on our loss and loss expense reserves, please see the "Critical Accounting Policies and Estimates" section of Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Our ability to reduce our risk exposure depends on the availability and cost of reinsurance. We transfer a significant portion of our underwriting risk to third parties through reinsurance contracts. These contracts provide reimbursement of losses exceeding specified amounts or percentages of premiums. Typically, our reinsurance coverages align with the coverages offered under our primary insurance policies. The availability, quality, amount, and cost of reinsurance depend on market conditions, including retrocessional reinsurance market capacity. Most of our reinsurance contracts have annual terms. Consequently, reinsurance costs may fluctuate significantly, not necessarily correlating to the loss experience of our specific book of business. State insurance regulators generally permit us to consider catastrophe reinsurance expense in our filed rates and rating plans. However, the conditions and timing of regulatory approval may not align with the actual expense of new reinsurance terms. Disproportionate increases in our reinsurance expense that we cannot include in our filed rates and rating plans will reduce our earnings. If we are unable to negotiate desired reinsurance amounts or terms, we may experience (i) increased reinsurance expense, (ii) increased risk retention on individual or aggregate claim losses, and (iii) limitations on our ability to write future business. 26 Commercial property and homeowners coverages have historically accounted for most of our catastrophe-related claims. To limit our exposure to catastrophe losses, we purchase catastrophe reinsurance. Our reinsurance coverage may prove to be inadequate, particularly if: • We do not purchase sufficient amounts of reinsurance because of defects or inaccuracies in the various modeling software programs we use to analyze our Insurance Subsidiaries' risk; A major catastrophe loss exceeds (i) the purchased reinsurance limit or (ii) the financial capacity of one or more of our reinsurers even if the loss is within the purchased limit; The combination of multiple catastrophe events in a single year is such that our Insurance Subsidiaries' insured losses exceed the aggregate limits of the catastrophe reinsurance treaty or our Insurance Subsidiaries experience an unusually large number of catastrophe losses that fall below our per occurrence reinsurance retention; Our reinsurance counterparties (i) are unable to access their reinsurance markets, or retrocessions, (ii) suffer significant financial losses, (iii) are sold, (iv) cease writing reinsurance business, or (v) are unable or unwilling to satisfy their contractual obligations to us; or The catastrophe losses insured in our primary policies are excluded from coverage in our reinsurance contracts. • • • • Recent economic, geopolitical, and insured loss events have increased global reinsurance market uncertainty. The impacts of (i) higher inflation-related reinsurance demand, (ii) reduced capacity due to reinsurer investment portfolio losses, (iii) weakened Euro-United States dollar currency exchange rates, (iv) recent Hurricane Ian-related reinsurer losses, (v) poor reinsurer profitability over the past six years, and (vi) investor and reinsurer concerns about the potential impacts of climate change have caused an increase in reinsurance prices and reduced the availability of reinsurance. How reinsurance supply and demand will adjust in the coming months and years is uncertain. To the extent we are exposed to primary policy losses from risks, such as cyber and communicable disease, now principally excluded from coverage under our reinsurance treaties, we face increased underwriting risk. Some of our reinsurance contracts also contain coverage wording that restricts our ability to cede potential losses related to terrorism, strikes, riots, or civil unrest. Increased underwriting risk could increase our net loss and loss expense, increasing our underwriting results volatility. Decreased reinsurance capacity also would increase our underwriting risk if we cannot fully place our existing reinsurance treaty coverage on renewal. If our reinsurers have difficulty collecting their retrocession programs or reinstating retrocession coverage after a large loss, our reinsurance claims may not be paid timely or in full. Even with the benefits of reinsurance, our catastrophe risk exposure could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We are exposed to credit risk. We face credit risk in several areas of our insurance operations, including from: • • • • Our reinsurers, which are obligated to make us payments under our reinsurance agreements. Reinsurance credit risk can fluctuate over time, increasing during periods of high industry catastrophe and liability losses. Reinsurers generally manage their significant loss exposure through their own reinsurance programs, or retrocessions, about which we do not always have the full details. If our reinsurers experience difficulty collecting on their retrocession programs or reinstating retrocession coverage after a large loss, we may not receive timely or full payment of our reinsurance claims. This means that we have direct and indirect counterparty credit risk to our reinsurers and the reinsurance industry, which is a global but concentrated market. Certain life insurance companies, if they fail to fulfill their contractual obligations to our policyholders or claimants under annuities we purchased as part of structured claims settlements. Some of our independent distribution partners, who collect premiums from policyholders for us. Some policyholders, who are directly obligated to us for premium and/or deductible payments, the timing of which may be impacted by mandated payment moratoriums. Our exposure to credit risk could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We depend on distribution partners. We market and sell our insurance products through independent, non-employee distribution partners. Insurance law and regulation makes us responsible for our distribution partners' business practices and customer interactions. Independent distribution partners have – and we expect will continue to have – a significant role in overall insurance industry premium 27 production. While our customers find advantages in using independent distribution partners, our reliance on independent distribution partners presents risks and challenges, including: • • • • Competition in our distribution channel, as we must market our products and services to our independent distribution partners who have access to products from multiple carriers and markets. Brand recognition challenges because we closely coordinate marketing with our distribution partners and some customers cannot differentiate their insurance agent from their insurer. Our market share growth is tied to our distribution partners' market share. Consequently, growth in our Standard Personal Lines could be more limited than in our Standard Commercial Lines. Competitors have focused on lower- cost "direct-to-customer" distribution models that emphasize digital ease and efficiencies to address the discrepancy in agency control of standard personal lines business. Continued advancements in "direct-to-customer" distribution models may impact our independent distribution partners' overall market share, make it more difficult for us to grow, or require us to establish relationships with more distribution partners. Aggregation and consolidation of our independent distribution partners and their market share, as some publicly- traded and private equity-backed independent distribution partners have deployed consolidation strategies to acquire other independent distribution partners and increase their market share ("Aggregators") over the last decade. If more of our independent distribution partners become Aggregators or are acquired by Aggregators, Aggregator demands and influence on our business could increase. For example, Aggregators could develop and implement strategies to consolidate their business with fewer insurers and demand higher base and supplemental commissions. Aggregators accounted for approximately 39% of our DPW at December 31, 2022, up from 33% three years ago. No one distribution partner is responsible for 10% or more of our combined insurance operations' premium. Our financial condition and results of operations are impacted by our independent distribution partners' success in marketing and selling our products and services. National and global economic conditions could adversely and materially affect our business, results of operations, financial condition, and growth. Unfavorable economic developments, such as increased inflation levels, could adversely affect our earnings if our policyholders need less insurance coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us. Inflation could significantly impact our claims severity across multiple lines of business and could result in adverse reserve development. Heightened economic inflation levels could also cause higher interest rates, likely increasing unrealized losses within our portfolio of fixed income securities and lowering total returns from our other invested assets. An economic downturn also could lead to increased credit and premium receivable risk, failure of reinsurance counterparties and other financial institutions, limitations on our ability to issue new debt, reduced liquidity, and declines in our investments' fair value and financial strength ratings. These potential events and other economic factors could adversely and materially affect our business, results of operations, financial condition, and growth. During 2022, 27% of DPW in our Standard Commercial Lines business was based on payroll or sales of our underlying policyholders. An economic downturn in which our policyholders have declining revenue or employee count could adversely affect our total written premium, including audit and endorsement premium. We write business domestically in the United States, and our insurance operations do not have direct exposure to businesses or individuals in Russia or Ukraine. We do not have material exposure to investments subject to embargoes or Russian reinsurance counterparties. However, the ongoing Russian war against Ukraine is impacting global economic, banking, commodity, and financial markets, exacerbating ongoing economic challenges, including inflation and supply chain disruption, which influence insurance loss costs, premiums, and investment valuation. A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and could have a material adverse effect on our financial condition and results of operations. A significant financial strength rating downgrade, particularly from AM Best, would affect our ability to write new or renewal business. Most policyholders are required by various third-party agreements, primarily with lenders, to maintain insurance policies from a carrier with a minimum AM Best or S&P rating. Credit rating downgrades could also make it more expensive to access capital markets. We cannot predict the rating actions NRSROs could take that might adversely affect our business or our potential responses. Any significant downgrade in our financial strength and credit ratings below an "A-" could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. For additional information on our current financial strength and credit ratings, refer to "Overview" in Item 1. "Business." of this Form 10-K. 28 Markets for insurance products and services are highly competitive and subject to rapid technological change, and we may be unable to compete effectively. We offer our insurance products and services in a highly competitive market characterized by consumer and business price sensitivity, aggressive price competition and improvements based on performance characteristics and large data sets that can compact underwriting margins, new products and services, evolving industry standards, and rapid adoption of technological advancements. Our ability to compete successfully depends heavily on our timely and consistent introduction of innovative new products and services. We face substantial competition from a wide range of property and casualty insurance companies for customers, distribution partners, and employees. Competitors include public, private, and mutual insurance companies. Many competitors are larger and may have lower relative operating costs, lower capital costs, or greater capacity to absorb or diversify more risk while maintaining their financial strength ratings. Other competitors, such as mutual or reciprocal companies, are owned by or operated cooperatively for insureds and, unlike us, do not have shareholders who evaluate ROE performance. Consequently, some competitors may be able to price their products more competitively. The Internet has emerged as a significant competitive digital marketplace for existing and new competitors. Established insurance competitors, like The Progressive Corporation, are beginning to explore broader digital Internet offerings. New competitors with variations on traditional business models have emerged, such as Lemonade, Root, and Next. Because the Internet makes it easier and less expensive to bundle products and services, it also is possible that non-insurance companies conducting business on the Internet could enter the insurance business or form strategic alliances with insurers in the future. Changes in competitors and competition, particularly on the Internet, could cause changes in the supply or demand for insurance and adversely affect our business. The increasing importance of the Internet, technology, and digital strategy in our industry also demands that we attract and retain employees in difficult-to-fill data science, advanced analytics, and IT roles – or suffer potential negative impacts. We have less loss experience data than our larger competitors. Insurers depend on access to reliable data about their policyholders and loss experience to build complex analytics and predictive models that assess risk profitability, reserve adequacy, adverse claim development potential, recovery opportunities, fraudulent activities, and customer buying habits. Because we use and depend on the aggregated industry loss data assembled by rating bureaus under the antitrust exemptions of the McCarran-Ferguson Act, we likely would be at a competitive disadvantage to larger insurers if Congress repealed the McCarran-Ferguson Act. We expect the importance of data science and analytics to increase, becoming more complex and accurate with larger sets of relevant data. Some larger competitors have significantly more data about the performance of their underwritten risks. In comparison, we may not have sufficient volumes of loss experience data to analyze and project our future costs as accurately or granularly. We supplement our data with industry loss experience from Verisk, AAIS, NCCI, and other publicly available sources. While relevant, industry data may not correlate specifically to the performance of our underwritten risks or be as predictive as data on a larger book of our own business. We are subject to various modeling risks that could have a material adverse impact on our business results. We rely on complex financial and other statistical models, developed internally and by third parties, to predict (i) underwriting results on individual risks and our overall portfolio, (ii) claims fraud and other claims impacts, such as escalation, (iii) impacts from catastrophes, (iv) enterprise risk management capital scenarios, and (v) investment portfolio changes. We rely on these financial and other statistical models to analyze historical loss costs and pricing, claims severity and frequency trends, catastrophe losses, reinsurance attachment and exhaustion points, investment performance, portfolio risk, and our economic capital position. Flaws in financial and statistical models and their embedded assumptions could lead to increased losses. For example, a significant component of climate change risk is that the frequency and severity of extreme weather events may evolve differently relative to historical levels – leading to greater model uncertainty. The increase in the frequency of land- falling hurricanes and tropical storms in the U.S. over the past five years could partly be climate change-related. In addition, increasing insurance regulatory interest in data and model use, combined with any potential restrictions on traditional rating factors or model use, could have a material adverse impact on our financial condition and operating results. Our statistical models are extremely useful in monitoring and controlling risk, but they are no substitute for senior management's experience or judgment. 29 Risks Related to Our Investments Segment Our investments are exposed to credit risk, interest rate fluctuation, and changes in value. We depend on income from our investment portfolio for a significant portion of our revenue and earnings. Our investments can be negatively affected by (i) liquidity, (ii) credit deterioration, (iii) financial results, (iv) public equity and/or debt market changes, (v) economic conditions, including heightened levels of economic inflation and any ongoing post-COVID-19 pandemic impacts, (vi) political risk, (vii) sovereign risk, (viii) interest rate fluctuations, or (ix) other factors, including climate change risk and civil unrest. Our investment portfolio's value is subject to credit risk from our held securities' issuers, guarantors, and financial guarantee insurers, and other counterparties in certain transactions. Defaults on any of our investments by any issuer, guarantor, financial guarantee insurer, or other counterparty could reduce our net investment income and increase net realized investment losses. We are subject to the risk that the issuers or guarantors of fixed income securities we own may default on principal and interest payment obligations. Additionally, we are exposed to interest rate risk, primarily related to the market price and cash flow variability associated with changes in interest rates. Consequently, the amount of our cash and cash equivalents, and the value and liquidity of our marketable and non-marketable securities may fluctuate substantially. Future fluctuations in the value of our cash, cash equivalents, and marketable and non-marketable securities could result in significant losses that have a material adverse impact on our financial condition and operating results. Our investment portfolio is exposed to climate change-related transition and physical investment risks. • • Transition risks arise from society’s transition to a low-carbon economy, driven by policy and regulations, low-carbon technology advances, and shifting public sentiment and societal preferences. This transition to renewable energy sources may lead to (i) stranded assets in sectors with high carbon footprints or those closely tied to carbon-based economic activity, such as the fossil fuel and automotive industries, (ii) increased costs for infrastructure reinvestment and replacement, and litigation defense of carbon-intensive sectors, (iii) lower corporate profitability, (iv) lower property values, and (v) lower household wealth. The Paris Agreement Capital Transition Assessment defines the carbon-intensive sectors as the most exposed to transition risks: oil and gas, coal, power, automotive, cement, aviation, and steel. As of December 31, 2022, carbon intensive sectors within our fixed income securities portfolio represented less than 4% of our total invested assets, down from 5% as of December 31, 2021. Physical investment risks include the risk of investment losses on our commercial and residential mortgage-backed securities that are exposed to climate-related catastrophic losses that can cause business disruption, destroy capital, increase costs to recover from disasters, reduce revenue, and cause population displacement and migration. These, in turn, can lower residential and commercial property values, household wealth, and corporate profitability, all potentially creating financial and credit market losses impacting insurer asset values. As of December 31, 2022, about 69% of our residential mortgage-backed securities were backed by government agencies. We generally invest in the top tranches of commercial mortgage-backed securities, which limit potential losses from property value declines. Significant future investment value declines could require further losses recorded on securities we sell and credit losses. For more information regarding market interest rate, credit, and equity price risk, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk." of this Form 10-K. We have securities tied to LIBOR, which will be eliminated on June 30, 2023. As of December 31, 2022, approximately 11% of our fixed income securities portfolio had floating rate securities primarily tied to 90-day U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). Historically, the global banking industry has used LIBOR as a primary metric to calculate interest rates for certain debt obligations, including personal and commercial loans, interest rate swaps, and other derivative products. In anticipation of LIBOR's elimination, the U.S. Federal Reserve established the Alternative Reference Rates Committee ("ARRC") to select a U.S. Dollar replacement index. The ARRC, comprised of a broad group of private-market participants, including banks, asset managers, insurers, and industry regulators, identified the Secured Overnight Financing Rate ("SOFR") as the LIBOR-replacement benchmark rate. SOFR is based on overnight repurchase agreement transactions backed by U.S. Treasury securities. The ARRC announced a paced transition plan for this new rate, including specific steps and timelines designed to encourage the adoption of SOFR. Effective June 30, 2023, LIBOR will cease to exist, requiring remaining floating rate securities to transition to SOFR. Consequently, our fixed income securities portfolio may be subject to (i) interest rate and prepayment risk associated with the resetting of our floating rate coupons from LIBOR to SOFR, (ii) potential rating agency downgrades, (iii) reduced trading liquidity on securities with 30 insufficient fallback transition language, and (iv) lower returns associated with basis risk from a reference rate mismatch between liabilities and assets in certain securitized assets. We continue to monitor the potential impact LIBOR's elimination and the transition to SOFR will have on our floating rate investments' performance. We have and will continue to evaluate and monitor other LIBOR risks across the organization. We are subject to the risks inherent in investing in private limited partnerships. Our alternative investments include private limited partnerships that invest in various strategies, such as private equity, private credit, and real assets. The primary assets and liabilities underlying in these limited partnership investments generally do not have quoted prices in active markets for the same or similar assets, so their valuation is subject to a higher level of subjectivity and unobservable inputs than substantially all of our other investments. Because we record these limited partnership investments under the equity method of accounting, any valuation decreases could negatively impact our results of operations. Determining the amount of credit losses taken on our investments is highly subjective and could materially impact our results of operations or our financial position. The determination of the amount of credit losses taken on our investments is based on our quarterly evaluation and assessment of our investments and known and inherent risks associated with the various asset classes. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly, reflecting changes in credit losses. There can be no assurance that management has accurately assessed the level of credit losses recorded in our Financial Statements. For further information about our evaluation and considerations for determining whether a security has a credit loss, please refer to "Critical Accounting Policies and Estimates" in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. Risks Related to Evolving Laws, Regulations, and Public Policy Debates We are subject to complex and changing laws, regulations, and public policy debates that expose us to regulatory scrutiny, potential liabilities, increased costs, reputational harm, and other adverse effects on our business. Our operations are subject to complex and changing state and federal laws, regulations, and public policy debates on subjects, including, without limitation, the following: Pricing and underwriting practices; • Claims practices; • Loss and loss adjustment expense reserves; • Exiting geographic markets and/or canceling or non-renewing policies; • ESG-related issues, including ESG investment mandates; • Climate change, including potential liability for related public disclosures; • Assessments for guaranty funds and second-injury funds, and other mandatory assigned risks and reinsurance; • • The types, quality, and concentration of investments we make; • Minimum capital requirements for the Insurance Subsidiaries; Dividends from our Insurance Subsidiaries to the Parent; • Privacy and data security; • Tax; • Antitrust; • Consumer protection; • Advertising; • Sales; • Billing and e-commerce; • Intellectual property ownership and infringement; • Digital platforms; • • Internet, telecommunications, and mobile communications; • Media and digital content; • • • • Workplace environmental, health, and safety issues. Availability of third-party software applications and services; Labor and employment; Anti-money laundering; and Changes to laws and regulations can adversely affect our business by increasing our costs, limiting our ability to offer a product or service to customers, requiring changes to our business practices, or otherwise making our products and services less attractive to customers. 31 If Congress passed legislation regulating insurer solvency oversight and state regulators remained responsible for rate approval, we could be subject to a conflicting regulatory framework that could impact our profitability and capital adequacy. While we underwrite risks only in the U.S., international regulatory developments, primarily capital adequacy and risk management requirements in the European Union ("EU"), may influence U.S. regulators as they develop or revise domestic regulatory standards. In the fourth quarter of 2020, the NAIC's Group Capital Calculation Working Group adopted the basic structure of its new Group Capital Calculation and drafted model law changes that provide for its adoption as a state law requirement for U.S. insurance groups. Our New Jersey state insurance regulators adopted the GCC model law in 2022. Based on our 2022 statutory financial statements prepared in accordance with SAP, our GCC ratio exceeds the regulatory action minimum threshold. If the GCC requirements or our financial position changes, it could increase the amount of capital our Insurance Subsidiaries are required to hold. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations. However, we can provide no assurance that our employees, contractors, or independent distribution partners will not violate such laws and regulations or our policies and procedures. To some degree, we have multiple regulators whose authority may overlap and may have different interpretations and/or regulations related to the same legal issues. Consequently, we have the risk that one regulator's position or interpretation may conflict with another regulator on the same issue. The cost of complying with various, potentially conflicting laws and regulations, and changes in those laws and regulations, could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. Insurers are subject to regulatory, political, and media scrutiny. We are subject to government market conduct reviews and investigations, legal actions, and penalties. There can be no assurance that our business will not be materially adversely affected by the outcomes of such examinations, investigations, or media scrutiny in the future. If we are found to have violated laws and regulations, it could materially adversely affect our reputation, financial condition, and operating results. Our business is subject to various state, federal, and other laws, rules, policies, and other obligations regarding data protection. We are subject to federal and state laws relating to the collection, use, retention, security, and transfer of personally identifiable information ("PII"). Federal laws include the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, the Drivers Privacy Protection Act, the Health Insurance Portability and Accountability Act, and Unfair and Deceptive Acts and Practices laws. Several states, like New York, Nevada, Colorado, Virginia, and California, have passed laws in this area, and other jurisdictions are considering imposing additional restrictions or creating new rights concerning PII. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance could result in significant reputational harm, penalties, and legal liability. The EU adopted the General Data Protection Regulation ("GDPR") in 2016 but it did not become effective until 2018. GDPR regulates data protection and privacy in the EU and transfers of personal data outside the EU. GDPR’s main tenet is to give individuals primary control over their personal data. Because we do not write coverages in the EU, GDPR does not directly impact us. Some U.S. states have subsequently incorporated individual-control mechanisms into state privacy laws. Future EU data privacy actions likely will influence U.S. regulators over time. We make statements about our use and disclosure of PII in our privacy policy, on our website, and in other public venues. If we fail to comply with these public statements or federal and state privacy-related and data protection laws and regulations, we could be subject to litigation or governmental actions. Such proceedings could impact our reputation and result in penalties, including ongoing audit requirements and significant legal liability. We are engaged in ordinary routine legal proceedings incidental to our insurance operations that are inherently unpredictable and could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. We are engaged in ordinary routine legal proceedings incidental to our insurance operations that include: • • • Defense of or indemnity for third-party suits brought against our insureds; Defense of actions brought against us by our insureds who disagree with our coverage decisions, some of which allege bad faith claims handling and seek extra-contractual damages, punitive damages, or other penalties; Actions we file, primarily for declaratory judgment, seeking confirmation that we have made appropriate coverage decisions under our insurance contracts; 32 • • Actions brought against competitors or us alleging improper business practices and sometimes seeking class status. Such actions historically have included issues and allegations, without limitation, related to (i) unfairly discriminatory underwriting practices, including the impact of credit score usage, (ii) managed care practices, such as provider reimbursement, and (iii) automobile claims practices; and Actions we file against third parties and other insurers for subrogation and recovery of other amounts we paid on behalf of our insureds. From time to time, legal proceedings in which we are involved may receive media attention based on their perceived newsworthiness and/or relationship to various broad economic, political, social, and legal developments or trends. Such media stories could negatively impact our reputation. We expect any potential ultimate liability for ordinary routine legal proceedings incidental to our insurance business will not be material to our consolidated financial condition after considering estimated loss provisions. Litigation outcomes, however, are inherently unpredictable, even with meritorious defenses. The time a case is in litigation also is unpredictable, as state court dockets are increasingly overcrowded. Generally, the longer a case is in litigation, the more expensive it can become. Because the amounts sought in certain actions are large or indeterminate, any adverse outcomes could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. Additionally, we do not have any material litigation risks related to climate change. Risks Related to Our Corporate Structure and Governance We are a holding company, and our ability to declare dividends to our shareholders, pay indebtedness, and enter into affiliate transactions may be limited because our Insurance Subsidiaries are regulated. Restrictions on our Insurance Subsidiaries' ability to pay dividends, make loans or advances to the Parent, or enter into transactions with affiliates may materially affect our ability to pay dividends on our preferred stock and common stock, or repay our indebtedness. Based on these restrictions, the maximum ordinary annual dividends the Insurance Subsidiaries can provide the Parent in 2023 is $283 million. Their ability to pay dividends or make loans or advances, however, is subject to domiciliary state insurance regulators' approval or review. For additional details regarding dividend restrictions, see Note 22. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. The Parent’s ability to pay dividends to its stockholders is also impacted by covenants in its credit agreement (the "Line of Credit") among the Parent, the named lenders (the "Lenders"), and Wells Fargo Bank, National Association, as Administrative Agent. These covenants obligate the Parent to, among other things, maintain a minimum consolidated net worth and a maximum ratio of debt to capitalization. Our preferred stock's terms limit the Parent's ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of its common stock or any shares of the Parent that rank junior to, or on parity with, the preferred stock if the Parent does not declare and pay (or set aside) dividends on the preferred stock for the last preceding dividend period. For additional details about the Line of Credit's financial covenants, see Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data" of this Form 10-K. For additional details about conditions related to our preferred stock, see Note 17. "Equity" in Item 8. "Financial Statements and Supplementary Data" of this Form 10-K. Because we are a New Jersey corporation and an insurance holding company, we may be less attractive to potential acquirers and our common stock's value could be adversely affected. We are a New Jersey company, and provisions of the New Jersey Shareholders' Protection Act and our Amended and Restated Certificate of Incorporation may discourage, delay, or prevent us from being acquired. A supermajority of our shareholders must approve (i) certain business combinations with interested shareholders, or (ii) any amendment to the related provisions of our Amended and Restated Certificate of Incorporation unless certain conditions are met. These conditions may relate to, among other things, the interested stockholder's acquisition of stock, the approval of the business combination by disinterested members of our Board and disinterested stockholders, and the price and payment of the consideration proposed in the business combination. In addition to considering the effects of any action on our shareholders (including any offer or proposal to acquire the Parent), our Board may consider: (i) the long-term, and short-term interests of the Parent and our shareholders, including the possibility that these interests may best be served by the Parent's continued independence; (ii) the effects of the action on the Parent's employees, suppliers, creditors, and customers; and (iii) the effects of the action on the community in which the Parent operates. 33 These provisions of our Amended and Restated Certificate of Incorporation and New Jersey law could deprive our common shareholders of an opportunity to receive a premium over the prevailing market price in a hostile takeover and could adversely affect the value of our common stock. Because we own insurance subsidiaries, any party seeking to acquire 10% or more of our common stock must seek prior approval from the subsidiaries' domiciliary insurance regulators and file extensive information about their business operations and finances. The New Jersey Department of Banking and Insurance Commissioner, who regulates seven of our Insurance Subsidiaries, also considers whether (i) the acquisition of control of an insurer would be adverse to the public interest or the protection of existing and future policyholders or (ii) persons seeking control would use control adversely to the public interest or the protection of policyholders. Risks Related to Our General Operations We and our distribution partners and vendors are subject to attempted cyber-attacks and other cybersecurity and system availability risks. Our business heavily relies on IT and application systems connected to or accessed from the Internet. Consequently, a malicious cyber-attack could affect us. Our systems also house proprietary and confidential information, including PII, about our operations, employees, agents, and customers and their employees and property. A malicious cyber-attack on (i) our systems, (ii) our distribution partners or their key operating systems, and (iii) any other of our third-party partners or vendors and their key operating systems may interrupt our ability to operate, damage our reputation and result in monetary damages that are difficult to quantify, and have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We have implemented systems and processes, through encryption and authentication technologies, intended to mitigate or secure our IT systems and prevent unauthorized access to, or loss of, sensitive data. As cyber-attacks continue to evolve daily, our security measures may not be sufficient for all eventualities. We may be vulnerable to hacking, employee error, malfeasance, system error, faulty password management, or other irregularities. These risks may be higher or lower for our third-party providers depending on the maturity of their security program, and we review their control environments to the extent possible and practical, aligning the risk exposure with our business requirements and risk tolerances. Any disruption or breach of our systems or data security could damage our reputation, result in difficult to quantify monetary damages, and have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. To mitigate this risk, we have and expect to continue to (i) conduct employee education programs and tabletop exercises and (ii) develop and invest in a variety of controls to prevent, detect, and appropriately react to cyber-attacks, including frequently testing our systems' security and access controls. We have insurance coverage for certain cybersecurity risks, including privacy breach incidents, which may be insufficient to indemnify against all arising losses or types of claims. In addition to cyber-attack risk, we face system availability risk. Our business relies heavily on various IT and application systems. We have robust business continuity plans designed to minimize the duration and impact of an unexpected loss of availability of any of these systems. Nevertheless, we could experience an event that impacts one or more of these systems, including those based in facilities where our vendors or we operate. This may interrupt our ability to operate and negatively impact our results of operations, despite our business continuity plans. Our long-term strategy to deploy operational leverage is dependent on the success of our risk management strategies, and their failure could have a material adverse effect on our financial condition or results of operations. As an insurer, we assume risk from our policyholders. Our long-term strategy includes using above-average operational leverage, measured as the ratio of NPW to our equity or statutory surplus. We balance and mitigate our operational leverage risk with several risk management strategies within our insurance operations to achieve a balance of growth and profit, including an underwriting risk appetite focused on small-to-medium-sized accounts. We do this by using significant reinsurance, a disciplined reserving approach, and a conservative investment philosophy. These strategies have inherent limitations. We cannot be certain that an event or series of unanticipated events will not occur and result in losses greater than we expect. Given our higher-than-industry average operating leverage, an event or series of unanticipated events could have a more material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings compared to our industry. Item 1B. Unresolved Staff Comments. None. 34 Item 2. Properties. Our headquarters is a 315,000 square foot building on an owned 56-acre site zoned for office and professional use in Branchville, New Jersey. We lease all our other operating facilities from unrelated parties. The principal office locations of our insurance operations are listed in the "Geographic Markets" section of Item 1. "Business." of this Form 10-K. Our Investments operations are principally located in leased space in Farmington, Connecticut. Our facilities provide adequate space for our present needs and, if additional space is needed, should be available on reasonable terms. Item 3. Legal Proceedings. We are routinely engaged in legal proceedings incidental to our insurance operations that have inherently unpredictable outcomes and could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. For additional information regarding our legal risks, refer to Item 1A. "Risk Factors." and Note 21. "Litigation" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. As of December 31, 2022, we have no material pending legal proceedings that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. Item 4. Mine Safety Disclosures. Not applicable. PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol "SIGI." (b) Holders We had 2,872 common stockholders of record as of January 31, 2023, according to our transfer agent's records. (c) Dividends Dividends on shares of our common stock are declared and paid at the discretion of the Board of Directors (the "Board") based on our results of operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. We expect to continue to pay quarterly cash dividends on shares of our common stock in the future. On November 2, 2022, the Board approved a 7% increase in our common stock dividend to $0.30 per share. In addition, on February 2, 2023, the Board declared a $0.30 per share quarterly cash dividend on common stock that is payable March 1, 2023, to stockholders of record as of February 15, 2023. (d) Securities Authorized for Issuance under Equity Compensation Plans The following table provides information about our common stock authorized for issuance under equity compensation plans as of December 31, 2022: (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))1 Plan Category Equity compensation plans approved by security holders 1Includes 1,116,863 shares available for issuance under our Employee Stock Purchase Plan (2021); 1,551,498 shares available for issuance under the Stock Purchase Plan for Independent Insurance Agencies; and 2,474,585 shares for issuance under the Selective Insurance Group, Inc. 2014 Omnibus Stock Plan ("Stock Plan"). Future grants under the Stock Plan can be made, among other things, as stock options, restricted stock units, or restricted stock. — $ — 5,142,946 35 (e) Performance Graph The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31, 2017, and ending December 31, 2022, comparing total stockholder return on our common stock to the total return of (i) the NASDAQ Composite Index and (ii) a select group of peer companies comprised of NASDAQ-listed companies in SIC Code 6330-6339, Fire, Marine, and Casualty Insurance. We have not incorporated this performance graph into any other filings we have made with the SEC. Unless we otherwise specifically state, it will not be incorporated by reference into any future SEC filings. This performance graph shall not be deemed "soliciting material" or be "filed" with the SEC unless we specifically request so or incorporate it by reference in any SEC filings we make. (f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table provides information about our purchases of our common stock in the fourth quarter of 2022: Period October 1 – 31, 2022 November 1 – 30, 2022 December 1 – 31, 2022 Total Number of Shares Purchased1 Average Price Paid Per Share 686 $ 294 1,894 91.01 93.17 91.25 Total Number of Shares Purchased as Part of Publicly Announced Programs2 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Announced Programs2 — — — 84.2 84.2 84.2 Total 1We purchased these shares from employees to satisfy tax withholding obligations associated with the vesting of their restricted stock units. 2On December 2, 2020, we announced our Board authorized a $100 million share repurchase program with no set expiration or termination date. Our repurchase program does not obligate us to acquire any particular amount of our common stock. Management will determine the timing and amount of any share repurchases under the authorization at its discretion based on market conditions and other considerations. 2,874 $ — $ 91.39 84.2 Item 6. Reserved. Not applicable. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking Statements The terms "Company," "we," "us," and "our" refer to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or the context otherwise requires. Certain statements in this Annual Report on Form 10-K, including information incorporated by reference, are “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements. These statements relate to our intentions, beliefs, projections, estimations, or forecasts 36 of future events and financial performance. They involve known and unknown risks, uncertainties, and other factors that may cause our or industry actual results, activity levels, or performance to materially differ from those expressed or implied by the forward-looking statements. In some cases, forward-looking statements include the words “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “target,” “project,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek,” “likely,” “continue,” or comparable terms. Our forward-looking statements are only predictions, and we can give no assurance that such expectations will prove correct. We undertake no obligation, other than as federal securities laws may require, to publicly update or revise any forward-looking statements for any reason. Factors that could cause our actual results to differ materially from what we project, forecast, or estimate in forward-looking statements are discussed in further detail in Item 1A. “Risk Factors.” of this form 10-K. These risk factors may not be exhaustive. We operate in a constantly changing business environment, and new risk factors may emerge anytime. We can neither predict these new risk factors nor assess their impact, if any, on our businesses or the extent any factor or combination of factors may cause actual results to differ materially from any forward-looking statements. Given these risks, uncertainties, and assumptions, the forward-looking events we discuss in this report might not occur. Introduction We classify our business into four reportable segments: • • • • Standard Commercial Lines; Standard Personal Lines; Excess and Surplus Lines ("E&S Lines"); and Investments. For more details about these segments, refer to Note 1. "Organization" and Note 12. "Segment Information" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. We write our Standard Commercial and Standard Personal Lines products and services through nine of our insurance subsidiaries, some of which participate in the federal government's National Flood Insurance Program's ("NFIP") Write Your Own Program ("WYO"). We write our E&S products through another subsidiary, Mesa Underwriters Specialty Insurance Company, a nationally-authorized non-admitted platform for customers who generally cannot obtain coverage in the standard marketplace. Collectively, we refer to our ten insurance subsidiaries as the "Insurance Subsidiaries." The following is Management's Discussion and Analysis ("MD&A") of the consolidated results of operations and financial condition, as well as known trends and uncertainties, that may have a material impact in future periods. The MD&A discusses and analyzes our 2022 results compared to 2021. Investors should read the MD&A in conjunction with Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. For discussion and analysis of our 2021 results compared to 2020, refer to Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. In the MD&A, we discuss and analyze the following: • • • • • Critical Accounting Policies and Estimates; Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020; Results of Operations and Related Information by Segment; Federal Income Taxes; and Liquidity and Capital Resources. Critical Accounting Policies and Estimates We have identified the policies and estimates critical to our business operations and the understanding of our results of operations. The policies and estimates we considered most critical to the preparation of the Financial Statements involved (i) reserves for loss and loss expense, (ii) investment valuation and the allowance for credit losses on available-for-sale ("AFS") fixed income securities, and (iii) reinsurance. 37 Reserves for Loss and Loss Expense Significant time can elapse between the occurrence of an insured loss, the reporting of the claim to us, and the final settlement and payment of the claim. To recognize liabilities for unpaid loss and loss expense, insurers establish reserves as balance sheet liabilities. The following tables provide case and incurred but not reported (“IBNR”) reserves for loss and loss expenses, and reinsurance recoverable on unpaid loss and loss expense as of December 31, 2022 and 2021: Total 757,513 1Includes our flood loss exposure related to our participation in the NFIP's WYO program, to which we cede 100% of our flood losses. 2Includes general liability (96% of net reserves) and commercial auto liability coverages (4% of net reserves). 3Includes commercial property (90% of net reserves) and commercial auto property coverages (10% of net reserves). 3,718,196 5,144,821 1,426,625 $ As of December 31, 2022 ($ in thousands) General liability Workers compensation Commercial automobile Businessowners' policies Commercial property Other Total Standard Commercial Lines Personal automobile Homeowners Other1 Total Standard Personal Lines E&S casualty lines2 E&S property lines3 Total E&S Lines December 31, 2021 ($ in thousands) General liability Workers compensation Commercial automobile Businessowners' policies Commercial property Other Total Standard Commercial Lines Personal automobile Homeowners Other1 Total Standard Personal Lines E&S casualty lines2 E&S property lines3 E&S Lines Loss and Loss Expense Reserves Case Reserves IBNR Reserves Total Reinsurance Recoverable on Unpaid Loss and Loss Expense Net Reserves $ 358,967 347,992 299,444 43,456 81,377 11,030 1,142,266 61,499 13,237 111,355 186,091 88,965 9,303 98,268 1,624,148 694,777 578,283 89,429 133,523 12,576 3,132,736 79,060 42,051 33,100 154,211 416,299 14,950 431,249 1,983,115 1,042,769 877,727 132,885 214,900 23,606 4,275,002 140,559 55,288 144,455 340,302 505,264 24,253 529,517 246,736 199,057 14,271 19,277 81,970 4,443 565,754 36,529 7,124 132,525 176,178 11,397 4,184 15,581 Loss and Loss Expense Reserves Case Reserves IBNR Reserves Total Reinsurance Recoverable on Unpaid Loss and Loss Expense Net Reserves $ 345,996 351,705 271,729 41,603 76,406 3,671 1,091,110 60,871 13,709 44,301 118,881 94,839 9,080 103,919 1,427,326 700,304 476,176 67,786 46,975 22,474 2,741,041 82,468 35,602 33,115 151,185 361,875 12,892 374,767 1,773,322 1,052,009 747,905 109,389 123,381 26,145 3,832,151 143,339 49,311 77,416 270,066 456,714 21,972 478,686 213,253 196,670 15,480 6,828 22,277 2,136 456,644 40,941 2,392 64,975 108,308 11,672 2,017 13,689 1,736,379 843,712 863,456 113,608 132,930 19,163 3,709,248 104,030 48,164 11,930 164,124 493,867 20,069 513,936 4,387,308 1,560,069 855,339 732,425 102,561 101,104 24,009 3,375,507 102,398 46,919 12,441 161,758 445,042 19,955 464,997 4,002,262 Total 578,641 1Includes our flood loss exposure relates to our participation in the NFIP's WYO program, to which we cede 100% of our flood losses. 2Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves). 3Includes commercial property (91% of net reserves) and commercial auto property coverages (9% of net reserves). 4,580,903 1,313,910 3,266,993 $ 38 The Insurance Subsidiaries' net loss and loss expense reserves duration was approximately 3.1 years at December 31, 2022, down from 3.5 years at December 31, 2021. How reserves are established Reserves for loss and loss expense include case reserves on reported claims and IBNR reserves. Case reserves are estimated on each individual claim based on claim-specific facts and circumstances known at the time. Case reserves may be adjusted up or down as the claim's specific facts and circumstances change. IBNR reserves are established at more aggregated levels, and they include provisions for (i) claims not yet reported, (ii) future development on reported claims, (iii) closed claims that could reopen in the future, and (iv) anticipated salvage and subrogation recoveries. Our thorough reserving process relies on quarterly internal reserve reviews, based on our own loss experience, with consideration given to various internal and external factors. Changes in claim dynamics may inherently change paid and reported development patterns. While the selections in our reserve analyses aim to account for these impacts, there remains an increased risk of variability in the estimated reserves. In addition to our internal reserve reviews, we have an external consulting actuary perform an independent review of our reserves semi-annually. We do not rely on the external consulting actuary's report to determine our recorded reserves; however, we review and discuss with the consulting actuary our respective observations regarding trends, key assumptions, and actuarial methodologies. While not required, our independent consulting actuary issues the annual statutory Statements of Actuarial Opinion for our Insurance Subsidiaries. For additional information on our accounting policy for reserves for loss and loss expense, refer to Note. 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Range of Reasonable Reserve Estimates We have estimated a range of reasonable reserve estimates for net loss and loss expense of $3,920 million to $4,662 million at December 31, 2022. This range reflects low and high reasonable reserve estimates determined by judgmentally adjusting the methods, factors, and assumptions selected within the internal reserve review. This approach produces a range of reasonable reserve estimates, and does not represent a distribution of all possible outcomes. Therefore, the final outcomes may be greater than or less than these amounts. The range of reasonable reserve estimates increased as of December 31, 2022, relative to December 31, 2021. This increase primarily relates to the growth in reserves commensurate with our growth in net premiums earned ("NPE"). Changes in Reserve Estimates (Loss Development) Our quarterly reserving process may lead to changes in the recorded reserves for prior accident years, referred to as favorable or unfavorable prior year loss and loss expense development. In 2022, we experienced net favorable prior year loss development of $78.9 million, compared to $82.9 million in 2021 and $72.9 million in 2020. The following table summarizes prior year development by line of business: (Favorable)/Unfavorable Prior Year Loss and Loss Expense Development ($ in millions) General liability Commercial automobile Workers compensation Businessowners' policies Commercial property Bonds Homeowners Personal automobile E&S casualty lines E&S property lines Other Total 2022 2021 2020 $ $ (5.0) 22.5 (70.0) (7.3) (1.6) (10.0) (0.6) 0.5 (5.0) (2.5) 0.1 (78.9) (29.0) 13.3 (58.0) (0.4) (2.6) — 1.8 (0.2) (7.0) (0.8) — (82.9) (35.0) 7.1 (60.0) 3.9 9.2 — 7.7 (1.8) — (4.0) — (72.9) A detailed discussion of recent reserve development by line of business follows. Standard Market General Liability Line of Business At December 31, 2022, our general liability line of business had recorded reserves, net of reinsurance, of $1.7 billion, representing 40% of our total net reserves. In 2022, this line experienced favorable development of $5.0 million, attributable to favorable inception-to-date claim frequencies in accident years 2020 and 2021. In 2021, this line experienced favorable development of $29.0 million, attributable to improved loss severities in accident years 2018 and prior. 39 By its nature, general liability presents a diverse set of exposures. Losses and loss trends are influenced by various factors, including legislative enactments, judicial decisions, and economic and social inflation. Economic inflation directly impacts our claims severities by increasing the costs of raw materials, medical procedures, and labor. Social inflation may impact both the frequency and severity of claims by affecting (i) the propensity for a claimant to file a claim, (ii) the percentage of claimants who engage lawyers, and (iii) the nature of judicial verdicts and amount of the associated awards, which influence settlement values going forward. We monitor claim litigation rates regularly and have observed modest increases in the percentage of claims with attorney involvement in recent periods. This trend and the impact of previous court closures are affecting the time to settle claims. We have exposure to abuse or molestation claims, mainly through insurance policies that we (i) underwrite through our Community and Public Services ("CAPS") strategic business unit, and (ii) issue to schools, religious institutions, day-care facilities, and other social services. These customers within our CAPS business unit represented approximately 10% of our total Standard Commercial Lines NPW in both 2022 and 2021. Through 2017, our exposure to abuse or molestation risk increased, reflective of our CAPS book's growth. In 2018, we implemented more stringent underwriting eligibility guidelines and partnered with a third party to better assess exposure and enhance loss control measures. In 2019, we filed and approved significant rate increases for this exposure. We continue to monitor each jurisdiction's statute of limitations to ensure our rate level accounts for the changing exposure as best we reasonably can. While these underwriting and pricing actions have been necessary to ensure the profitability of the portfolio going forward, they have limited our CAPS growth in recent years. We also have exposure to abuse or molestation claims from recently enacted state laws that extend the statute of limitations or permit windows for abuse or molestation claims and lawsuits to be filed that statutes of limitations previously barred. Consequently, we may receive claims decades after the alleged acts occurred that will involve complex claims coverage determinations, potential litigation, higher defense costs, and potentially the need to collect from reinsurers under older reinsurance agreements. Our claims and actuarial departments actively monitor these claims to identify changes in frequency or severity and any emerging or shifting trends. While this should help us better understand this rapidly evolving exposure, the ultimate impact of social, political, and legal trends remains highly uncertain, and may significantly impact the ultimate settlement values for these claims. Standard Market Workers Compensation Line of Business At December 31, 2022, our workers compensation line of business had recorded reserves, net of reinsurance, of $844 million, representing 19% of our total net reserves. During 2022, this line experienced favorable reserve development of $70.0 million, due to favorable inception-to-date claim frequencies in accident year 2020, and improved loss severities in accident years 2020 and prior. Similarly, this line experienced favorable reserve development during 2021 of $58.0 million, driven by accident years 2019 and prior. During both 2022 and 2021, the lower loss emergence than expected was partly due to: (i) medical inflation that was lower than originally anticipated; and (ii) various claims initiatives we have implemented. Because of the length of time injured workers can receive related medical treatment, decreases in medical inflation can cause favorable loss development over an extended number of accident years. A variety of issues can impact the workers compensation line of business, such as: Unexpected changes in medical cost inflation – The industry is currently experiencing a period of lower medical claim cost inflation. However, alongside elevated inflation as measured by the Consumer Price Index, medical costs are also beginning to rise, though to a lesser degree. Changes in our historical workers compensation medical costs, along with potential changes in future medical inflation, can create additional variability in our reserves; Changes in statutory workers compensation benefits – Benefit changes may be enacted that affect all outstanding claims, including claims that have occurred in the past, but have not yet been settled. Depending on the social and political climate, these changes may either increase or decrease associated claim costs; Changes in utilization of the workers compensation system – These changes may be driven by economic, legislative, or other changes, such as increased pharmaceutical prescriptions, more complex medical procedures, changes in permanently injured workers' life expectancy, and health insurance availability. Standard Market Commercial Automobile Line of Business At December 31, 2022, our commercial automobile line of business had recorded reserves, net of reinsurance, of $863 million, which represented 20% of our total net reserves. In 2022, this line experienced unfavorable prior year reserve development of $22.5 million, driven by increased severities in the 2021 accident year. In 2021, this line experienced unfavorable prior year reserve development of $13.3 million, driven by higher loss severities in accident years 2016 through 2019. 40 For both us and the industry, the commercial automobile line has experienced unfavorable trends in recent years. Pre- pandemic, increased frequencies were likely due to increased miles driven related to lower unemployment, poor road quality, and an increase in distracted driving. The pandemic and the governmental "stay-at-home" orders issued in early 2020 dramatically reduced miles driven and road traffic, significantly reducing claims frequency in 2020. At the same time, along with industry reporting of dramatic increases in risky driving behaviors, such as speeding, distracted driving, and driving while under the influence, traffic deaths per mile driven increased significantly. As miles driven increased in 2021 and 2022, fatality rates per mile driven have somewhat tempered, but remain well above pre-pandemic levels. This, along with the impacts of social inflation, continue to put pressure on claim severities in this line. As of the end of 2022, frequencies remained somewhat below pre-pandemic levels due to shifts in commuting patterns and fewer low-speed crashes. Increasing property damage and physical damage severities relate to (i) elevated repair costs for increasingly complex vehicles that incorporate more technology, (ii) longer periods of rental reimbursement costs for claims, and (iii) recent inflationary impacts and disruptions to the supply chain. Continued complications in the supply chain, including labor shortages, increase the risk of longer-term elevated economic inflation. Over the last several years, we have taken actions to improve the profitability of this line of business, including: • • • Taking meaningful rate and underwriting actions on our renewal portfolio. We continue to leverage our predictive modeling and analytical capabilities that provide guidance and automatic retrieval of relevant public information on existing and potential policyholders to provide more granular insights about where we should focus our actions. Reducing premium leakage by improving the quality of our rating information, including validating application information with third-party data and obtaining more detailed vehicle usage information. Aggressively managing new business pricing and hazard mix while deploying co-underwriting by our regional underwriters and corporate underwriting teams' subject matter experts for selected higher hazard classes to improve risk-driver recognition and exposure-based pricing. Standard Market Personal Automobile Line of Business At December 31, 2022, our personal automobile line of business had recorded reserves, net of reinsurance, of $104 million, which represented 2% of our total net reserves. In 2022, this line experienced unfavorable prior year reserve development of $0.5 million. In 2021, this line experienced favorable prior year reserve development of $0.2 million. Some of the same issues affecting the commercial automobile line are affecting this line. The COVID-19-related reduction in frequencies was even more pronounced than in the commercial automobile line. As with the commercial automobile line, these frequencies significantly rebounded in 2021 and 2022, yet remain less than pre-pandemic levels. This line has a similar potential for increasing average severities like the commercial automobile line. In addition to the COVID-19-related temporary impacts, the underlying trends of increased vehicle repair costs and poor road quality are likely causes of rising severities, exacerbated by riskier driving behaviors, including distracted driving trends. We continue to recalibrate our predictive models and refine our underwriting and pricing approaches. While we believe these underwriting and pricing changes will ultimately lead to improved profitability and greater stability, the resulting changes to our exposure profile may impact paid and reported development patterns, thereby increasing the uncertainty in the reserves in the near term. E&S Casualty Lines of Business At December 31, 2022, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $494 million, representing 11% of our total net reserves. Our E&S casualty lines results have improved over recent years. In 2022, this line experienced favorable prior year reserve development of $5.0 million, primarily attributable to favorable inception-to-date claim frequencies and lower loss severities in accident years 2020 and 2021. In 2021, this line experienced favorable prior year reserve development of $7.0 million, primarily attributable to lower loss severities in accident years 2016 and prior. Some of the risk factors for the general liability line also affect the E&S casualty lines. These include (i) economic inflation, such as materials and labor costs; and (ii) social trends, such as increased attorney involvement. The E&S casualty lines also are impacted by operational changes we have made to improve the portfolio's performance. Prior to 2022, our underwriting operations have substantially exited several targeted business classes that have historically produced volatile results, including commercial automobile liability, liquor liability, and snow removal. In addition, we have shifted more of our sales towards middle market business without materially increasing the overall risk profile of the portfolio. 41 Recent E&S casualty claims actions have created further casualty improvements: • We created a dedicated E&S claims team in our corporate claims function, bringing greater expertise and consistency to E&S claims handling. • We segregated “litigated,” “non-litigated,” and "high exposure" claims, with separate specialized teams for each. • We implemented the following operational and expense improvement initiatives for legal counsel: ◦ ◦ ◦ Increased the use of staff counsel, increasing legal staff in their assigned territories to support claims volume; Heightened focus on legal budgeting and expense management; and Implemented a panel counsel review process. While we believe these underwriting and claims operational changes improved our underwriting experience, there is risk associated with these changes. Most notably, changes in portfolio composition or our claims processes may inherently change paid and reported development patterns. While our reserve analyses incorporate methods that adjust for these changes, there remains a greater risk of fluctuation in the estimated reserves. Other impacts creating additional loss and loss expense reserve uncertainty Claims Initiative Impacts Consistent with our strategic imperative to optimize operational effectiveness and efficiency, our Claims Department continually identifies areas for improvement and efficiency to increase our value proposition to policyholders. These improvements may lead to claims practice changes that affect average case reserve levels and claims settlement rates, which directly impact the data used to project ultimate loss and loss expense. While these changes may increase uncertainty in our estimates in the short term, we expect refined management of the claims process to be the longer-term benefit. Our internal reserve analyses incorporate certain actuarial projection methods that make adjustments for changes in case reserve adequacy and claims settlement rates. These methods adjust our historical loss experience to the current case adequacy or settlement rate level, providing a more consistent basis for projecting future development patterns. These methods, like all projection methods, have their own associated assumptions and judgments. Therefore, no single method can be interpreted as definitive. Unanticipated Changes in Inflation United States ("U.S.") monetary policy and global economic conditions bring additional uncertainty related to inflationary trends. Changes in inflation affect the ultimate settlement costs for many of our lines of business, with the greatest reserve impact on the longer-tailed lines, such as general liability and workers compensation. Therefore, uncertainty about future inflation or deflation creates the potential for additional reserve variability in these lines of business. Sensitivity analysis: Potential impact on reserve estimates due to changes in key assumptions Our process to establish reserves includes a variety of key assumptions, such as: • • • • The selection of loss and loss expense development factors; The weight to be applied to each individual actuarial projection method; Projected future loss trends; and Expected claim frequencies, severities, and ultimate loss and loss expense ratios for the current accident year. The importance of any single assumption depends on several considerations, such as line of business and accident year. If the actual experience emerges differently than the assumptions underlying the reserve process, changes in our reserve estimates are possible that may be material to the results of operations in future periods. Below are sensitivity tests highlighting potential impacts to loss and loss expense reserves for the major casualty lines of business under different scenarios. These tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years. Therefore, the results do not constitute an actuarial range. While the figures represent possible impacts from variations in certain key assumptions, there is no assurance that future loss and loss expense emergence will be consistent with either our current or alternative sets of assumptions. While the sources of reserve variability are generated by different internal and external trends and operational changes, they ultimately manifest themselves as changes in the expected loss and loss expense development patterns. These patterns are a key assumption in the reserving process. In addition, the current accident year expected loss and loss expense ratios are a key assumption. These ratios are developed through a rigorous process of projecting recent accident years' experience to an ultimate settlement basis. Then they are adjusted to the current accident year's pricing and loss cost levels. The impact from underwriting portfolio and claims handling practice changes are also quantified and reflected where appropriate. As with all estimates, the ultimate loss and loss expense ratios may differ from those currently estimated. 42 The sensitivities of loss and loss expense reserves to these key assumptions are illustrated below for the major casualty lines. The first table displays estimated impacts from changes in expected reported loss and loss expense development patterns for our major casualty lines of business. It shows line of business reserve impacts if the actual calendar year incurred amounts are greater or less than current expectations by the selected percentages. While judgmental, the selected percentages by line are based on the reserve range analysis and the actual historical reserve development for the line of business. The second table displays the estimated impacts from changes to the expected loss and loss expense ratios for the current accident year. It shows reserve impacts by line of business if the expected loss and loss expense ratios for the current accident year are greater or less than current expectations by the selected percentages. Reserve Impacts of Changes to Expected Loss and Loss Expense Reporting Patterns ($ in millions) General liability Workers compensation Commercial automobile liability Personal automobile liability E&S casualty lines Percentage Decrease/ Increase (Decrease) to Future Calendar Year Reported Increase to Future Calendar Year Reported 10 % $ 18 15 15 10 (180) $ (105) (115) (10) (50) 180 105 115 10 50 Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios ($ in millions) General liability Workers compensation Commercial automobile liability Personal automobile liability E&S casualty lines Percentage Decrease/ Increase (Decrease) to Current Accident Year Expected Loss and Loss Expense Ratio Increase to Current Accident Year Expected Loss and Loss Expense Ratio 10 pts $ 10 10 10 10 (90) $ (35) (60) (10) (25) 90 35 60 10 25 Note that there is some overlap between the impacts in the two tables. For example, increases in the calendar year development would ultimately impact our view of the current accident year's loss and loss expense ratios. However, these tables provide perspective on the sensitivity of each key assumption. While the changes represent outcomes based on reasonably likely changes to our underlying reserving assumptions, they do not represent a range of possible outcomes. Our reserves could increase or decrease significantly from what the tables above reflect. Asbestos and Environmental Reserves Our general liability, excess liability, businessowners' policies, and homeowners reserves include exposure to asbestos and environmental claims. The emergence of these claims occurs over an extended period and can be unpredictable. The total recorded net loss and loss expense reserves for these claims were $20.3 million as of December 31, 2022 and $21.1 million as of December 31, 2021, with asbestos claims constituting approximately 23% of these reserves in both years. Environmental claims have arisen primarily from insured landfill exposures in municipal government and small non- manufacturing commercial risk, as well as leaking underground storage tanks within our homeowners policies. Asbestos claims have arisen primarily from policies issued to various distributors of asbestos-containing products, such as electrical and plumbing materials. We handle our asbestos and environmental claims in a centralized and specialized asbestos and environmental claim unit. That unit establishes case reserves on individual claims based on the facts and circumstances known at a given point in time, which are supplemented by IBNR reserves. Estimating IBNR reserves for asbestos and environmental claims is difficult because these claims have delayed and inconsistent reporting patterns. In addition, there are significant uncertainties associated with estimating critical reserve assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Limiting our exposure to asbestos and environmental claims are (i) the fuel oil system exclusion on our New Jersey homeowners policies that we introduced in 2007, and (ii) the Insurance Services Office, Inc.'s Total Pollution Exclusion that was introduced in the mid-1980s. Prior to the mid-1980s, we primarily wrote Standard Personal Lines, which has also limited our exposure to asbestos and environmental claims. 43 Other Latent Exposures We also have other latent and continuous trigger exposures in our ongoing portfolio. Examples include claims for construction defect and abuse or molestation, for which states have increased and expanded the statute of limitations. We manage our exposure to these liabilities through our underwriting and claims practices, and a dedicated claims unit, similar to our handling of asbestos and environmental claims. The impact of social, political, and legal trends on these claims remains highly uncertain, so our related loss and loss expense reserves remain highly uncertain. These exposures remain in our ongoing portfolio, and as such, are reserved in aggregate, with other exposures within the line of business reserves. Investment Valuation and the Allowance for Credit Losses on AFS Fixed Income Securities Investment Valuation Accounting guidance defines the fair value of our investment portfolio as the exit price, or the amount that would be (i) received to sell an asset, or (ii) paid to transfer a liability in an orderly transaction between market participants. When determining an exit price, we must rely on observable market data, if available. Most securities in our equity portfolio have readily determinable fair values and are recorded at fair value with changes in unrealized gains or losses recognized through income. Our AFS fixed income securities portfolio is recorded at fair value, and the related unrealized gains or losses are reflected in stockholders' equity, net of tax. For our AFS fixed income securities portfolios, fair value is a key factor in the measurement of (i) losses on securities for which we have the intent to sell, and (ii) changes in the allowance for credit losses. The fair value of approximately 93% of our investments measured at fair value are classified as either Level 1 or Level 2 in the fair value hierarchy and are priced using observable inputs for identical or similar assets. About 7% are classified as either (i) Level 3 and are based on unobservable market inputs because the related securities are not traded on a public market, or (ii) not leveled because the related securities are measured at fair value using net asset value per share (or its practical expedient). For additional information, refer to the following within Item 8. "Financial Statements and Supplementary Data." of this Form 10- K: (i) item (d) of Note 2. "Summary of Significant Accounting Policies" regarding descriptions of the levels within the fair value hierarchy and the valuation techniques used for our Level 3 securities, and (ii) Note 7. "Fair Value Measurements" for additional information on the unobservable inputs in our securities measured using Level 3 inputs. Allowance for Credit Losses on AFS Fixed Income Securities When fixed income securities are in an unrealized loss position and we do not intend to sell them, we record an allowance for credit losses for the portion of the unrealized loss related to an expected credit loss. We estimate expected credit losses on these securities by performing a risk-adjusted discounted cash flow (“DCF”). The allowance for credit losses is the excess of amortized cost over the greater of (i) our estimate of the present value of expected future cash flows, or (ii) fair value. The allowance for credit losses cannot exceed the unrealized loss, and therefore it may fluctuate with changes in the security's fair value. We also consider the need to record losses on securities in an unrealized loss position for which we have the intent to sell. We analyze unrealized losses for credit loss in accordance with our existing accounting policy, which includes performing DCF analyses on securities at the lot level and analyzing these DCFs using various economic scenarios. In performing these DCF analyses, we calculate the present value of future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information and forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The models contain forecasted economic data from the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of the various scenarios occurring. Based on these analyses, we recorded an allowance for credit losses of $45.7 million in 2022, and $9.7 million in 2021, on our AFS fixed income securities portfolio. After considering the allowance for credit losses, the remaining unrealized losses on this portfolio were $537.2 million in 2022 and $17.4 million in 2021. The increase in 2022 compared to 2021 was driven by an increase in benchmark U.S. Treasury rates and a widening of credit spreads, with the increase in interest rates having the most significant impact. If the security-specific and macroeconomic assumptions in our DCF analyses or our outlook as to the occurrence probability of our DCF model scenarios were to change, our allowance for credit losses and the resulting credit loss expense or benefit will negatively or positively impact our results of operations. Factors considered in determining the allowance for credit losses require significant judgment, including our evaluation of the security's projected cash flow stream. For additional information regarding our allowance for credit losses on AFS fixed income securities, see item (c) of Note 2. "Summary of Significant Accounting Policies" and item (i) of Note 5. "Investments" within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, respectively. 44 Reinsurance Reinsurance recoverables on paid and unpaid loss and loss expense represent our estimates of the amounts we will recover from reinsurers. Each reinsurance contract is analyzed to ensure that sufficient risk is transferred to record the transactions appropriately as reinsurance in the Financial Statements. Amounts recovered from reinsurers are recognized as assets contemporaneously and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. An allowance for credit losses on our reinsurance recoverable balance is recorded based on an evaluation of balances due from reinsurers and other available information, including collateral we hold under the terms and conditions of the underlying agreements. Reinsurers often purchase and rely on their own retrocessional reinsurance programs to manage their capital position and improve their financial strength ratings. Details about retrocessional reinsurance programs are not always transparent, making it difficult to assess our reinsurers' exposure to counterparty credit risk. Our reinsurer's credit quality is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. In addition, contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance. Our allowance for estimated uncollectible reinsurance was $1.6 million at both December 31, 2022, and December 31, 2021. We continually monitor developments that may impact recoverability from our reinsurers, for which we have contractual remedies if necessary. For further information regarding reinsurance, see the “Reinsurance” section below in "Results of Operations and Related Information by Segment" and Note 9. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 20201 ($ in thousands, except per share amounts) Financial Data: Revenues After-tax net investment income After-tax underwriting income Net income before federal income tax Net income Net income available to common stockholders 2022 2021 2022 vs. 2021 2020 2021 vs. 2020 $ 3,558,062 232,199 131,774 280,186 224,886 215,686 3,379,164 263,000 172,688 505,310 403,837 394,484 5 % $ 2,922,274 184,612 107,716 302,988 246,355 246,355 (12) (24) (45) (44) (45) Key Metrics: Combined ratio Invested assets per dollar of common stockholders' equity Total return on investments Return on average common equity ("ROE") Net premiums written to statutory surplus ratio Per Common Share Amounts: Diluted net income per share Book value per share Dividends declared per share to common stockholders Non-GAAP Information: Non-GAAP operating income2 Non-GAAP operating income per diluted common share2 Non-GAAP operating ROE2 Adjusted book value per common share2 $ $ $ $ 95.1 % 3.37 2.9 % 8.8 1.44 x 3.54 38.57 1.14 92.8 2.88 3.4 14.8 1.33 6.50 46.24 1.03 2.3 pts 17 % $ (0.5) pts (6.0) 0.11 94.9 % 2.96 2.6 % 10.4 1.30 (46) % $ (17) 11 4.09 42.38 0.94 306,384 5.03 12.4 % 45.49 380,580 6.27 14.3 43.23 (19) % $ (20) (1.9) pts 249,686 4.15 10.5 % 5 % $ 37.29 1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in this financial review. 2Non-GAAP operating income, non-GAAP operating income per diluted common share, and non-GAAP operating ROE are measures comparable to net income available to common stockholders, net income available to common stockholders per diluted common share, and ROE, respectively, but exclude after- tax net realized and unrealized gains and losses on investments included in net income. Adjusted book value per common share is a measure comparable to book value per common share, but excludes total after-tax unrealized gains and losses on investments included in accumulated other comprehensive (loss) income. These non-GAAP measures are important financial measures used by us, analysts, and investors because the timing of realized and unrealized investment gains and losses on securities in any given period is largely discretionary. In addition, net realized and unrealized investment gains and losses on investments could distort the analysis of trends. 45 16 % 42 60 67 64 60 (2.1) pts (3) % 0.8 pts 4.4 0.03 59 % 9 10 52 % 51 3.8 pts 16 % 4.09 0.07 (0.01) 4.15 10.4 0.2 (0.1) 10.5 42.38 (6.45) 1.36 37.29 Reconciliations of our GAAP to non-GAAP measures are provided in the tables below: Reconciliation of net income available to common stockholders to non-GAAP operating income ($ in thousands) Net income available to common stockholders Net realized and unrealized investment losses (gains) included in net income, before tax Tax on reconciling items Non-GAAP operating income Reconciliation of net income available to common stockholders per diluted common share to non-GAAP operating income per diluted common share Net income available to common stockholders per diluted common share Net realized and unrealized investment losses (gains) included in net income, before tax Tax on reconciling items Non-GAAP operating income per diluted common share $ $ $ $ 2022 2021 2020 215,686 114,808 (24,110) 306,384 394,484 (17,599) 3,695 380,580 246,355 4,217 (886) 249,686 2022 2021 2020 3.54 1.89 (0.40) 5.03 6.50 (0.29) 0.06 6.27 Reconciliation of ROE to non-GAAP operating ROE ROE Net realized and unrealized investment losses (gains) included in net income, before tax Tax on reconciling items Non-GAAP operating ROE 2022 2021 2020 8.8 % 4.7 (1.1) 12.4 % 14.8 (0.7) 0.2 14.3 Reconciliation of book value per common share to adjusted book value per common share Book value per common share Total unrealized investment losses (gains) included in accumulated other comprehensive (loss) income, before tax Tax on reconciling items Adjusted book value per common share $ 2022 2021 2020 38.57 8.75 (1.83) 45.49 46.24 (3.80) 0.79 43.23 The components of our ROE and non-GAAP operating ROE are as follows: ROE Components Standard Commercial Lines segment Standard Personal Lines segment E&S Lines segment Total insurance operations Net investment income Net realized and unrealized investment (losses) gains Total investments segment Other ROE Net realized and unrealized investment losses (gains), after tax Non-GAAP operating ROE 2022 2021 2022 vs. 2021 2020 2021 vs. 2020 4.6 % (0.2) 1.0 5.4 9.4 (3.6) 5.8 (2.4) 8.8 3.6 12.4 % 5.9 0.1 0.5 6.5 9.9 0.5 10.4 (1.3) pts (0.3) 0.5 (1.1) (0.5) (4.1) (4.6) 5.1 (0.5) — 4.6 7.8 (0.1) 7.7 0.8 pts 0.6 0.5 1.9 2.1 0.6 2.7 (2.1) (0.3) (1.9) (0.2) 14.8 (0.5) 14.3 (6.0) 4.1 (1.9) 10.4 0.1 10.5 4.4 (0.6) 3.8 In 2022, we generated our ninth consecutive year of double-digit non-GAAP operating ROEs, with a 12.4% non-GAAP operating ROE, which was above our full-year 2022 target of 11%, but below our 2021 non-GAAP operating ROE of 14.3%. This was a significant achievement in a year with elevated net catastrophe losses, capital market volatility, and higher loss cost trends driven by elevated inflation, among other factors. Our results reflect the success of our underwriting discipline and profitable growth strategies. The 1.9-point decrease in non-GAAP operating ROE in 2022 compared to 2021 was primarily driven by a reduction in after-tax underwriting and investment income. After-tax underwriting income decreased $40.9 million, or 1.1 ROE points, in 2022 compared to 2021, primarily from increased non-catastrophe property loss and loss expenses. The higher non-catastrophe property loss and loss expenses were mainly due to the higher inflationary environment that resulted in an increase in the cost 46 of materials and labor associated with repairs. While net catastrophe losses were down slightly in 2022 compared to 2021, these losses included a significant impact from Winter Storm Elliott. This storm, which occurred in late-December 2022, impacted 37 states, 26 of which are in our Standard Commercial Lines footprint. We recorded $135.0 million of gross losses, or $46.1 million net of reinsurance. In addition, we incurred $11.7 million in reinstatement premium, resulting in a total impact of $57.8 million, pre-tax, or 1.9 ROE points and $0.75 per diluted common share. After-tax net investment income decreased $30.8 million, or 0.5 ROE points, in 2022 compared to 2021, from lower after-tax alternative investment income in 2022. Partially offsetting this decrease was an increase in income earned on fixed income securities, which benefited from higher new purchase yields in 2022 as a result of the rapid rise in benchmark U.S. Treasury rates and slightly wider credit spreads. In addition, our ROE was reduced by the impact of net realized and unrealized investment gains and losses, which was 3.6 ROE points in 2022. Net realized and unrealized investment losses in 2022 compared to net realized and unrealized investment gains in 2021 drove the reduction in our ROE. The increase in net realized and unrealized losses resulted from (i) a decrease in valuations reflecting the current public equities market, (ii) active trading of our fixed income securities to increase the book yield of our fixed income portfolio due to increasing new purchase yields, resulting in realized losses, and (iii) higher credit loss expense on our AFS fixed income securities portfolio. Outlook For 2023, we established a non-GAAP operating ROE target of 12%. Our 2023 target is based on (i) our current estimated weighted average cost of capital ("WACC"), (ii) an approximate 400 basis point spread over our estimated WACC, (iii) the current interest rate environment, and (iv) property and casualty insurance market conditions. Our 2023 12% non-GAAP operating ROE target sets a high bar for our financial performance, challenges us to perform at our best, and aligns our incentive compensation structure with shareholder interests. In 2022, the elevated level of economic inflation, the significant increase in interest rates, and predictions of a recession in the near term, which led to a widening of credit spreads, have all contributed to lower investment valuations and significant financial market volatility. The higher interest rates, and to a lesser extent the widening of credit spreads, have reduced the fair value of our fixed income securities, which in turn has negatively impacted our stockholders' equity, which was down 15% in 2022. The higher economic inflation has also negatively impacted our property loss and loss expenses through increased severities in our short-tail property lines, which has reduced our underwriting income. Should these trends continue, and in the absence of taking enough rate and other underwriting actions, our underwriting profitability could be negatively impacted in the near term. We will continue to focus on underwriting improvements, proper insurance-to-value on our property exposures, and achieving written renewal pure price increases that meet or exceed expected loss trend. In 2022, we achieved Standard Commercial Lines renewal pure price increases of 5.4% and exposure growth of 4.0%. These rates were up from 2021, which experienced renewal pure price increases of 5.3% and exposure growth of 2.6%. While higher interest rates, wider credit spreads, and financial market volatility have negatively impacted our investment valuations and certain key financial metrics, such as stockholders' equity and book value per common share, they have also provided us with the opportunity to invest our cash flows at significantly higher new purchase yields. Our pre-tax new purchase yields for fixed income securities averaged 4.5% in 2022, compared to 2.3% in 2021. The portfolio's net investment income also benefited from our 11% allocation to floating rate fixed income securities, which are primarily tied to 90-day U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). The 90-day LIBOR increased to 4.77% at December 31, 2022 from 0.21% at December 31, 2021. These floating securities have reset quarterly at higher rates, which combined with our higher new purchase yields for fixed income securities, contributed to higher net investment income from our fixed income securities. Partially offsetting the increase in net investment income from fixed income securities were lower returns from our allocation to alternative investments. We expect these dynamics to continue in 2023, and as such, are factored into our full-year 2023 after-tax net investment income expectations, as discussed below. Our focus in 2023 will continue to be on several other foundational areas to position us for ongoing success: • Delivering on our strategy for continued disciplined and profitable growth by: ◦ ◦ Continuing to expand our Standard Commercial Lines market share by (i) increasing our share towards our 12% target of our agents' premiums, (ii) strategically appointing new agents, and (iii) maximizing new business growth in the small business market through the utilization of our enhanced small business platform; Expanding our geographic footprint. In June 2022, we began writing Standard Commercial Lines business in Vermont. In October 2022, we began writing Standard Commercial Lines business in Alabama and Idaho. 47 ◦ ◦ ◦ We plan to expand our Standard Commercial Lines footprint into other states over time; Increasing customer retention by delivering a superior omnichannel experience and offering value-added technologies and services; Shifting our Standard Personal Lines products and services towards customers in the mass affluent market, where we believe we can be more competitive with the strong coverage and servicing capabilities that we offer; and Deploying our new underwriting platform in our E&S segment and improving agents' ease of interactions with us. • Continuing to build on a culture centered on the values of diversity, equity, and inclusion that fosters innovation, idea generation, and developing a group of specially trained leaders who can guide us successfully into the future. As we look ahead to 2023, we believe the elevated level of economic inflation will persist and continue to negatively impact our short-tail property lines of business and may impact our general and administrative expenses. In addition, we expect reduced reinsurance capacity and higher demand for new and expanded reinsurance purchases by U.S. primary insurance companies will result in higher reinsurance prices in 2023 and less favorable terms and conditions for the industry, including us. We experienced reinsurance price increases at our January 1, 2023 renewals, as discussed in the "Reinsurance" section below. While these factors could negatively impact our 2023 combined ratio and underwriting profits, we believe we are well- positioned to navigate these challenges and expect to continue generating strong overall returns. For 2023, our full-year guidance is as follows: • • • A GAAP combined ratio of 96.5%, including net catastrophe losses of 4.5 points. Our combined ratio estimate assumes no prior year casualty reserve development; After-tax net investment income of $300 million that includes after-tax net investment income from our alternative investments of $30 million; An overall effective tax rate of approximately 21.0%, which assumes an effective tax rate of 20.0% for net investment income and 21.0% for all other items; and • Weighted average shares of 61 million on a fully diluted basis, which assumes no share repurchases we may make under our authorization. Results of Operations and Related Information by Segment Insurance Operations The following table provides quantitative information for analyzing the combined ratio: All Lines ($ in thousands) Insurance Operations Results: Net premiums written ("NPW") NPE Less: Loss and loss expense incurred Net underwriting expenses incurred Dividends to policyholders Underwriting income Combined Ratios: Loss and loss expense ratio Underwriting expense ratio Dividends to policyholders ratio Combined ratio 2022 2021 2022 vs. 2021 2020 2021 vs. 2020 $ 3,573,590 3,373,380 2,111,778 1,089,942 4,858 166,802 $ 3,189,713 3,017,253 1,813,984 979,537 5,140 218,592 12 % $ 2,773,092 2,681,814 12 16 11 (5) (24) % $ 1,635,823 905,830 3,812 136,349 62.7 % 32.3 0.1 95.1 60.1 32.5 0.2 92.8 2.6 pts (0.2) (0.1) 2.3 61.0 % 33.8 0.1 94.9 15 % 13 11 8 35 60 % (0.9) pts (1.3) 0.1 (2.1) The 12% NPW growth in 2022 compared to 2021 reflected (i) overall renewal pure price increases, and (ii) higher direct new business, as shown in the following table: ($ in millions) Direct new business premiums Renewal pure price increases on NPW 2022 $ 731.7 5.1 % 2021 2020 648.5 4.9 579.7 4.3 48 Our NPW growth in 2022 also benefited from strong retention. In addition, increased economic activity and inflation in the U.S. resulted in our customers increasing their sales, payrolls, and exposure units, all of which favorably impacted our NPW. The increase in NPE in 2022 compared to 2021 resulted from the same impacts to NPW described above. Loss and Loss Expenses The loss and loss expense ratio increased 2.6 points in 2022 compared to 2021, primarily due to the following: ($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses For the year ended December 31, 2022 2021 2020 Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio $ 617.9 471.7 410.0 $ 18.3 pts 15.6 15.3 145.9 164.2 215.4 4.3 pts 5.4 8.0 22.6 21.0 23.3 (Favorable)/ Unfavorable Year-Over-Year Change 1.6 (2.3) 4.4 Net catastrophe losses in 2022 were lower than losses in 2021 and 2020; however, 2022 did include gross losses from Winter Storm Elliott of $135.0 million, or net losses of approximately $46.1 million, or 1.6 points. This storm impacted 37 states, 26 of which are in our Standard Commercial Lines footprint, and primarily included property losses from damage to commercial businesses and personal homes. Including the impact of reinstatement premium of $11.7 million for this event, the total impact to the overall combined ratio was 1.7 points. Net catastrophe losses of 5.4 points in 2021 were higher than our longer-term net catastrophe loss averages. Catastrophe losses in 2021 included gross losses of $53 million from Hurricane Ida, or net losses of approximately $41 million, or 1.4 points. The majority of the Hurricane Ida losses, which included meaningful property losses from damage to personal and commercial automobiles, occurred in New Jersey and the surrounding states. Details of the prior year casualty reserve development were as follows: ($ in millions) (Favorable) Prior Year Casualty Reserve Development Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable)/Unfavorable Year-Over-Year Change For the year ended December 31, 2022 2021 2020 (86.0) (81.0) (85.0) (2.5) pts (2.7) (3.2) (Favorable)/Unfavorable Prior Year Casualty Reserve Development ($ in millions) General liability Commercial automobile Workers compensation Businessowners' policies Bonds Total Standard Commercial Lines Homeowners Personal automobile Total Standard Personal Lines E&S 2022 $ (5.0) 15.0 (70.0) (11.0) (10.0) (81.0) — — — (5.0) Total (favorable) prior year casualty reserve development $ (86.0) (Favorable) impact on loss ratio (2.5) pts 0.2 0.5 (0.9) (35.0) 10.0 (60.0) — — (85.0) — — — — (85.0) (3.2) 2021 2020 (29.0) 15.0 (58.0) (2.0) — (74.0) — — — (7.0) (81.0) (2.7) In addition to the prior year casualty reserve development, current year casualty loss costs increased 0.7 points in 2022 compared to 2021, primarily driven by a higher estimated loss trend. 49 For additional qualitative discussion on prior year reserve development, current year casualty loss costs, and non-catastrophe property loss and loss expenses, refer to the insurance segment sections below. Standard Commercial Lines Segment ($ in thousands) Insurance Segments Results: NPW NPE Less: Loss and loss expense incurred Net underwriting expenses incurred Dividends to policyholders Underwriting income Combined Ratios: Loss and loss expense ratio Underwriting expense ratio Dividends to policyholders ratio Combined ratio 2022 2021 2022 vs. 2021 2020 2021 vs. 2020 $ 2,901,984 2,739,819 1,683,988 907,277 4,858 143,696 $ 2,593,018 2,443,885 1,426,768 813,381 5,140 198,596 12 % $ 2,230,636 2,143,184 12 18 12 (5) (28) % $ 1,245,627 742,014 3,812 151,731 61.5 % 33.1 0.2 94.8 58.4 33.3 0.2 91.9 3.1 pts (0.2) — 2.9 58.1 % 34.6 0.2 92.9 16 % 14 15 10 35 31 % 0.3 pts (1.3) — (1.0) NPW growth of 12% in 2022 compared to 2021 reflected (i) renewal pure price increases, (ii) higher direct new business, and (iii) strong retention as shown in the table below. In addition, NPW growth in 2022 benefited from exposure growth. ($ in millions) Direct new business premiums Retention Renewal pure price increases on NPW For the Year Ended December 31, 2022 2021 $ 512.5 $ 85 % 5.4 469.9 85 5.3 The increase in NPE in 2022 compared to 2021 resulted from the same impacts to NPW described above. The 3.1-point increase in the loss and loss expense ratio in 2022 compared to 2021 was primarily driven by the following: ($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses For the year ended December 31, 2022 2021 Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change $ 461.1 340.7 16.8 pts 13.9 $ 95.6 104.1 3.5 pts 4.3 20.3 18.2 2.1 (1.1) Our loss and loss expenses in 2022 compared to 2021 included (i) elevated non-catastrophe property loss and loss expenses, primarily due to increased severities resulting from inflationary pressures on labor and material costs, and (ii) lower net catastrophe losses, as discussed below and in the "Insurance Operations" section above. Our 2022 catastrophe losses were impacted by 48 events designated as catastrophes by Property Claims Services ("PCS"), an internationally recognized authority on insured catastrophe property losses, including (i) several wind and thunderstorm events that occurred throughout the second quarter of 2022, and (ii) Winter Storm Elliott, a cross-country storm that impacted 26 of our footprint states in December 2022. Catastrophe losses in 2021 were impacted by 46 events that PCS designed as catastrophes, including two severe thunderstorms accompanied by wind and hail, Hurricane Ida, and a series of severe tornadoes. ($ in millions) (Favorable) Prior Year Casualty Reserve Development For the year ended December 31, 2022 2021 $ Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable)/Unfavorable Year-Over-Year Change (81.0) (74.0) (3.0) pts (3.0) — 1.0 50 For quantitative information on favorable prior year casualty reserve development by line of business, see the "Insurance Operations" section above. For qualitative information about the significant drivers of this development, see the line of business discussions below. The loss and loss expense ratio increase in 2022 also included an increase in current year casualty loss costs of 0.9 points in 2022 compared to 2021, primarily driven by a higher estimated loss trend. The following is a discussion of our most significant Standard Commercial Lines of business: General Liability ($ in thousands) NPW Direct new business Retention Renewal pure price increases NPE Underwriting income Combined ratio % of total Standard Commercial Lines NPW 1n/a: not applicable. $ $ 2022 958,121 151,005 85 % 4.5 902,428 104,517 88.4 % 33 2022 vs. 20211 12 % $ n/a n/a n/a 12 % $ (15) 3.7 pts 2021 859,284 139,255 85 4.4 807,158 123,450 84.7 33 2020 716,119 122,159 85 % 3.9 694,019 103,262 85.1 % 32 2021 vs. 20201 20 % n/a n/a n/a 16 % 20 (0.4) pts NPW growth of 12% in 2022 compared to 2021 benefited from exposure growth, strong retention, renewal pure price increases, and direct new business. The combined ratio increased 3.7 points in 2022 compared to 2021, primarily driven by less favorable prior year casualty reserve development, as follows: ($ in millions) For the year ended December 31, 2022 2021 $ (Favorable) Prior Year Casualty Reserve Development Impact on Loss and Loss Loss and Loss Expense Expense Ratio Incurred (Favorable)/Unfavorable Year-Over-Year Change (5.0) (29.0) (0.6) pts (3.6) 3.0 1.4 The favorable prior year casualty reserve development in 2022 was primarily attributable to favorable inception-to-date claim frequencies in accident years 2021 and 2020. The 2021 favorable prior year casualty reserve development was primarily attributable to improved loss severities in accident years 2018 and prior. The combined ratio increase in 2022 also included an increase in current year casualty loss costs of 1.1 points in 2022 compared to 2021, primarily driven by (i) higher estimated loss trend for this line, and (ii) an increase in ceded casualty reinstatement premium principally due to development on one large loss from the 2018 treaty year and two large losses from the 2020 treaty year. This line is exposed to changes in economic and social trends, including litigation propensity and outcomes, and changes in state laws, such as those that extend the statute of limitations or open windows for previously time-barred actions. Commercial Automobile ($ in thousands) NPW Direct new business Retention Renewal pure price increases NPE Underwriting loss Combined ratio % of total Standard Commercial Lines NPW 1n/a: not applicable. $ $ 2022 860,116 125,129 86 % 8.1 812,306 (63,112) 107.8 % 30 2022 vs. 20211 12 % $ n/a n/a n/a 12 % $ (170) 4.6 pts 2021 767,723 115,088 86 8.3 724,398 (23,335) 103.2 30 2020 658,930 112,893 86 % 8.1 615,181 (3,126) 100.5 % 30 2021 vs. 20201 17 % n/a n/a n/a 18 % (646) 2.7 pts NPW growth of 12% in 2022 compared to 2021 benefited from renewal pure price increases, higher direct new business, and strong retention. NPW also benefited from 5% growth of in-force vehicle counts as of December 31, 2022, compared to December 31, 2021. 51 The combined ratio increased 4.6 points in 2022 compared to 2021, primarily driven by the following: ($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change 2022 2021 $ 172.2 125.2 21.2 pts $ 17.3 3.1 9.8 0.4 pts 1.4 21.6 18.7 2.9 3.1 Loss and loss expenses in 2022 compared to 2021 experienced (i) lower net catastrophe losses, as discussed in the "Insurance Operations" section above, and (ii) elevated non-catastrophe property loss and loss expenses, primarily due to higher severities from inflationary and supply chain impacts that have increased labor, material, and replacement vehicle costs, as well as the duration of claims, which impacts vehicle rental days. ($ in millions) Unfavorable Prior Year Casualty Reserve Development For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change 2022 2021 $ 15.0 15.0 1.8 pts 2.1 (0.3) 0.5 The unfavorable prior year casualty reserve development in 2022 was primarily due to increased severities in the 2021 accident year. The 2021 unfavorable prior year casualty reserve development was primarily attributable to unfavorable reserve development on loss severities in accident years 2016 through 2019. In addition, the combined ratio was impacted by a 1.9-point increase in current year casualty loss costs in 2022 compared to 2021, due to (i) an expected increase in claim frequencies from a more normalized amount of miles driven as COVID-19- related impacts continue to lessen, and (ii) increased loss severity expectations following the unfavorable development for the 2021 accident year. This line of business remains an area of focus for us and most of the industry, as profitability challenges continue to generate combined ratios higher than targets. We will continue to actively seek price increases on this line and execute on targeted underwriting and claims actions to improve the mix of business and claim outcomes. Commercial Property ($ in thousands) NPW Direct new business Retention Renewal pure price increases NPE Underwriting income (loss) Combined ratio % of total Standard Commercial Lines NPW 1n/a: not applicable. $ $ 2022 535,666 118,470 84 % 6.2 495,647 (7,015) 101.4 pts 18 2022 vs. 20211 14 % $ n/a n/a n/a 14 % $ (167) 3.8 2021 470,043 108,418 84 6.0 436,412 10,515 97.6 18 2020 413,194 94,697 84 % 4.6 388,120 (21,296) 105.5 pts 19 2021 vs. 20201 14 % n/a n/a n/a 12 % (149) (7.9) NPW growth of 14% in 2022 compared to 2021 benefited from renewal pure price increases, exposure growth, strong retention, and higher direct new business. The combined ratio increased 3.8 points in 2022 compared to 2021, primarily driven by the following: ($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses For the year ended December 31, 2022 2021 Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change $ 240.5 182.5 48.5 pts 41.8 $ 75.3 79.3 15.2 pts 18.2 63.7 60.0 3.7 (6.7) 52 Loss and loss expenses in 2022 compared to 2021 experienced (i) lower net catastrophe losses, as discussed in the "Insurance Operations" section above, and (ii) elevated non-catastrophe property loss and loss expenses. The elevated non-catastrophe property loss and loss expenses was primarily due to increased severity compared to 2021 reflecting inflationary pressures on building material and labor costs. As profitability challenges continue to generate combined ratios higher than targets, we will continue to actively seek price increases on this line and execute on targeted underwriting and claims actions to improve the mix of business and claim outcomes. Workers Compensation ($ in thousands) NPW Direct new business Retention Renewal pure price increases (decreases) NPE Underwriting income Combined ratio % of total Standard Commercial Lines NPW 1n/a: not applicable. $ $ 2022 340,802 61,726 86 % (0.5) 335,955 91,087 72.9 % 12 2022 vs. 20211 7 % $ n/a n/a n/a 10 % $ 16 (1.5) pts 2021 317,035 59,938 86 0.1 306,428 78,537 74.4 12 2020 270,168 51,078 84 % (2.0) 278,062 70,897 74.5 % 12 2021 vs. 20201 17 % n/a n/a n/a 10 % 11 (0.1) pts NPW increased 7% in 2022 compared to 2021 due to exposure growth, strong retention, and higher direct new business. The combined ratio decreased 1.5 points in 2022 compared to 2021, primarily driven by favorable prior year casualty reserve development: ($ in millions) (Favorable) Prior Year Casualty Reserve Development For the year ended December 31, 2022 2021 $ Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Unfavorable/(Favorable) Year-Over-Year Change (70.0) (58.0) (20.8) pts (18.9) (1.9) 2.7 The favorable prior year casualty reserve development in 2022 was primarily due to continued favorable medical trends in accident years 2020 and prior, and favorable inception-to-date claim frequencies in accident year 2020. The favorable prior year casualty reserve development in 2021 was primarily due to continued favorable medical trends in accident years 2019 and prior. Due to the length of time injured workers can receive related medical treatment, decreases in medical inflation can cause favorable loss development across an extended number of accident years. Standard Personal Lines Segment ($ in thousands) Insurance Segments Results: NPW NPE Less: Loss and loss expense incurred Net underwriting expenses incurred Underwriting income Combined Ratios: Loss and loss expense ratio Underwriting expense ratio Combined ratio 2022 2021 2022 vs. 2021 2020 2021 vs. 2020 $ $ 319,059 299,405 231,113 75,485 (7,193) 77.2 % 25.2 102.4 292,265 293,559 212,116 77,477 3,966 72.2 26.4 98.6 9 % $ 2 295,166 299,140 9 (3) (281) % $ 233,260 81,388 (15,508) 5.0 pts (1.2) 3.8 78.0 % 27.2 105.2 (1) % (2) (9) (5) (126) % (5.8) pts (0.8) (6.6) NPW increased 9% in 2022 compared to 2021, primarily due to (i) higher direct new business, (ii) stronger retention, (iii) higher homeowner coverage amounts due to inflation adjustments, and (iv) higher average policy sizes from our mass affluent market strategy. In the third quarter of 2021, we transitioned our personal lines strategy to targeting customers in the mass affluent market where we believe our strong coverage and servicing capabilities will be more competitive. 53 ($ in millions) Direct new business premiums1 Retention Renewal pure price increases on NPW 1Excludes our flood direct premiums written, which is 100% ceded to the NFIP and therefore, has no impact on our NPW. $ 2022 2021 62.9 $ 85 % 0.7 40.9 82 1.0 The increase in NPE in 2022 compared to 2021 resulted from the same impacts to NPW discussed above. The loss and loss expense ratio increased 5.0 points in 2022 compared to 2021, driven by the following: ($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses For the year ended December 31, 2022 2021 Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change $ 117.1 102.8 39.1 pts 35.0 $ 40.8 37.4 13.6 pts 12.7 52.7 47.7 5.0 (6.9) Our 2022 catastrophe losses were impacted by 43 events designated as catastrophes by PCS, including (i) several wind and thunderstorm events that occurred throughout the second quarter of 2022, and (ii) Winter Storm Elliott in December 2022. Our 2021 catastrophe losses were impacted by 44 events designated as catastrophes by PCS, including two severe thunderstorms accompanied by wind and hail, Hurricane Ida, and a series of severe tornadoes. In addition, we experienced elevated non-catastrophe property loss and loss expenses in 2022 compared to 2021, driven by higher personal automobile physical damage losses. These higher losses resulted from (i) higher frequencies from increased miles driven, and (ii) greater severities from inflationary and supply chain impacts that have increased labor, material, and replacement vehicle costs, and the duration of claims, which impacts vehicle rental days. The likely continuation of elevated non-catastrophe property loss and loss expenses, coupled with renewal pure price increases below loss trend, will put pressure on this segment's profitability in the near-term. To alleviate pressure on profitability in our homeowners line of business, we have and continue to apply valuation inflationary adjustments at renewal, and file rate increases to mitigate these inflationary impacts. Additionally, the personal automobile line of business remains an area of focus for us and most of the industry, as profitability challenges continue to generate combined ratios higher than targets. We will continue to actively seek price increases on this line and execute on targeted underwriting and claims actions to improve the mix of business and claim outcomes. The underwriting expense ratio decreased 1.2 points in 2022 compared to 2021, primarily due to a decrease in labor expenses. E&S Lines Segment ($ in thousands) Insurance Segments Results: NPW NPE Less: Loss and loss expense incurred Net underwriting expenses incurred Underwriting income (loss) Combined Ratios: Loss and loss expense ratio Underwriting expense ratio Combined ratio 2022 2021 2022 vs. 2021 2020 2021 vs. 2020 $ $ 352,547 334,156 196,677 107,180 30,299 58.8 % 32.1 90.9 304,430 279,809 175,100 88,679 16,030 62.6 31.7 94.3 16 % $ 19 247,290 239,490 12 21 89 % $ 156,936 82,428 126 (3.8) pts 0.4 (3.4) 65.5 % 34.4 99.9 23 % 17 12 8 12,622 % (2.9) pts (2.7) (5.6) 54 NPW growth of 16% in 2022 compared to 2021 reflected renewal pure price increases and higher direct new business as shown in the table below. In addition, NPW growth in 2022 benefited from exposure growth driven by favorable E&S Lines marketplace conditions. ($ in millions) Direct new business premiums Renewal pure price increases on NPW 2022 $ 156.3 7.3 % 2021 137.7 6.5 The increase in NPE in 2022 compared to 2021 resulted from the same impacts to NPW discussed above. The loss and loss expense ratio decreased 3.8 points in 2022 compared to 2021, primarily driven by the following: ($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses For the year ended December 31, 2022 2021 Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change $ 39.6 28.2 11.9 pts 10.1 $ 9.6 22.7 2.9 pts 8.1 14.8 18.2 (3.4) (1.8) We experienced lower net catastrophe losses in 2022 compared 2021. Our 2022 catastrophe losses were impacted by 44 events that PCS designated as catastrophes, including severe weather affecting Midwestern states. Winter Storm Elliott did not have a meaningful impact on our E&S Lines segment. Our 2021 losses were impacted by 50 events that PCS designated as catastrophes, including Winter Storm Uri affecting Texas, a series of large storms affecting Southern and Midwestern states, and Hurricane Ida. We experienced elevated non-catastrophe property loss and loss expenses in 2022 compared to 2021, primarily due to increased severity reflecting inflationary pressures on labor and material costs, and the normal period-to-period volatility of our property lines of business in this segment. ($ in millions) For the year ended December 31, 2022 2021 $ (Favorable) Prior Year Casualty Reserve Development Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable)/Unfavorable Year-Over-Year Change (5.0) (7.0) (1.5) pts (2.5) 1.0 (2.5) The favorable prior year casualty reserve development in 2022 was primarily attributable to favorable inception-to-date claim frequencies and lower loss severities in accident years 2021 and 2020. The favorable prior year casualty reserve development in 2021 was primarily attributable to lower loss severities in accident years 2016 and prior. In addition, the loss and loss expense ratio was favorably impacted by a 1.3-point decrease in current year casualty loss costs in 2022 compared to 2021. Our E&S casualty lines results have improved over recent years after benefiting from several underwriting and claims initiatives and strong rate increases. The decrease in current year casualty loss costs reflects the impacts of these actions. Reinsurance We use reinsurance to protect our capital resources and insure against losses on property and casualty risks that we underwrite in excess of the amount that we are prepared to accept. We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries through which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers. Reinsurance Pooling Agreement The primary purposes of the Insurance Subsidiaries' reinsurance pooling agreement are to: • • Pool or share proportionately the underwriting profit and loss results of property and casualty insurance underwriting operations through reinsurance; Reduce administration expenses; and 55 • Permit all the Insurance Subsidiaries to obtain a uniform rating from AM Best Company ("AM Best"). The following illustrates the pooling percentages by Insurance Subsidiary as of December 31, 2022: Insurance Subsidiary Selective Insurance Company of America ("SICA") Selective Way Insurance Company ("SWIC") Selective Insurance Company of South Carolina ("SICSC") Selective Insurance Company of the Southeast ("SICSE") Selective Insurance Company of New York ("SICNY") Selective Casualty Insurance Company ("SCIC") Selective Auto Insurance Company of New Jersey ("SAICNJ") Mesa Underwriters Specialty Insurance Company ("MUSIC") Selective Insurance Company of New England ("SICNE") Selective Fire and Casualty Insurance Company ("SFCIC") Pooling Percentage 32.0% 21.0% 9.0% 7.0% 7.0% 7.0% 6.0% 5.0% 3.0% 3.0% Reinsurance Treaties and Arrangements By entering into reinsurance treaties and arrangements, we can increase our underwriting capacity, accepting larger individual risks and aggregations of risks without directly increasing our capital or statutory surplus. Under our reinsurance treaties, we cede to our reinsurers a portion of our incurred losses from an individual policy or group of policies in exchange for a portion of the premium on those policies. Amounts not reinsured below a specified dollar threshold are known as retention. Reinsurance does not legally discharge us from liability under the terms and limits of our policies, but it does make our reinsurers liable to us for the amount of liability we cede to them. Our reinsurers often rely on their own reinsurance programs, or retrocessions, to manage their large loss exposures. The size of the global reinsurance community is relatively small. If our reinsurers are unable to collect on their retrocessional programs, it may impair their ability to pay us for the amounts we cede to them. Consequently, our reinsurers present us with direct, indirect, and contingent counterparty credit risk. We attempt to mitigate this credit risk by (i) pursuing relationships with reinsurers rated “A-” or higher by AM Best and/or (ii) obtaining collateral to secure reinsurance obligations. Some of our reinsurance treaties permit us to terminate or commute them – or require the reinsurer to post collateral if the reinsurer's financial condition or rating deteriorates. We monitor our reinsurers' financial condition, and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our reinsurance counterparty credit risk, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. We have reinsurance contracts that separately cover our property and casualty insurance business that can be segregated into the following key categories: • • • • Property Reinsurance, which includes our (i) property excess of loss treaties purchased for protection against large individual property losses and (ii) property catastrophe treaties purchased to provide protection for the overall property portfolio against severe catastrophic events. We also purchase a limited amount of facultative reinsurance, primarily for large individual property risks greater than our property excess of loss treaty capacity. Casualty Reinsurance, which provides protection for both individual large casualty losses and catastrophic casualty losses involving multiple claimants or insureds. We also may use facultative reinsurance, primarily for large individual casualty risks in excess of our treaty capacity. We may also purchase quota share capacity for certain new or higher severity casualty lines of business. Terrorism Reinsurance, which provides a federal reinsurance backstop, behind the protection built into our property and casualty reinsurance treaties, for terrorism losses covered under the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). For further information about TRIPRA, see Item 1A. “Risk Factors.” of this Form 10-K. Flood Reinsurance, for which all of the premiums and losses related to our participation in the WYO (for which we also receive a servicing fee) are 100% ceded to the federal government. Property Reinsurance We renewed our main property catastrophe treaty, which covers both our standard market and E&S business, effective January 1, 2023. For this treaty, we increased our treaty limit by $100 million and increased our treaty retention by $20 million to 56 respond to our growing property portfolio. As a result, the coverage was extended to $915 million in excess of the $60 million retention with higher co-participations in certain layers as our overall net purchased limits increased to $810 million from $776 million. A hardening reinsurance pricing environment was also characterized by significant efforts on the part of reinsurers to impose restrictions on cedents' terms and conditions, particularly with respect to coverage for non-modeled/under-modeled perils, such as terrorism, strike, riot, civil unrest, severe convective storms, and the systemic perils of communicable disease and cyber. Consequently, the property catastrophe program excludes coverage for communicable disease, but retains limited reinsurance coverage for terrorism, strike, riot, civil unrest, severe convective storms, and cybersecurity risks. Despite these limitations, coverage for other traditionally covered property perils was largely maintained. Additionally, we made the decision to not purchase our expiring E&S Lines $30 million in excess of $10 million treaty, which covered all 50 states and the District of Columbia, due to challenging market conditions and our assessment of the projected reinsurance spend relative to expected covered losses. We seek to minimize reinsurance credit risk by transacting with highly-rated reinsurance partners and purchasing collateralized reinsurance products, particularly for high-severity, low-probability events, if feasible. Our current reinsurance program includes $216 million in collateralized limit in the top layer of the catastrophe program, compared to $259 million in collateralized limit under the prior year's reinsurance program. Overall, ceded premium for our property catastrophe reinsurance treaty will increase considerably in 2023 due to three factors: (i) increases in underlying property exposures in line with our growing property insurance portfolio; (ii) the addition of $100 million of coverage purchased to maintain stability in our net risk profile; and (iii) significant risk-adjusted price increases due to a severely hardening reinsurance market driven by such dynamics as elevated inflation-driven demand for reinsurance capacity, reinsurer investment losses, exchange rate impacts, poor reinsurance profitability over the past six years, limited supply of retrocessional capacity, and reinsurer and investor concerns over climate change and un-modeled/under-modeled perils. We model various catastrophic perils, and hurricane risk continues to be our portfolio's most significant natural catastrophe peril because of the geographic location of the risks we insure. The table below illustrates the impact of the five largest hurricane losses we have experienced in the last 35 years: ($ in millions) Net Loss2 45.6 41.5 40.2 3.0 15.7 1This amount represents reported and unreported gross losses estimated as of December 31, 2022. 2Net loss does not include reinstatement premiums, taxes, or flood claims handling fees. Hurricane Name Superstorm Sandy Hurricane Ida Hurricane Irene Hurricane Hugo Hurricane Isabel Gross Loss1 $125.5 50.8 44.8 26.4 25.1 Accident Year 2012 2021 2011 1989 2003 Gross Loss Ratio 7.9% 1.7 3.1 5.9 2.2 Net Loss Ratio 2.9 1.4 2.8 0.7 1.4 We review our exposure to hurricane risk by examining third-party vendor models and conducting our own proprietary analysis. The third-party vendor models provide a long-term view that closely relates modeled event frequency to historical hurricane activity, adjusting to reflect certain non-modeled cost assumptions, such as the impact of loss expenses, residual market assessments, and automobile-related losses. We believe that modeled estimates provide a range of potential outcomes, and we review multiple estimates to understand our catastrophic risk. Our established catastrophic risk tolerance requires that no more than 10% of stockholders’ equity is exposed to a loss from a hurricane event at a 99.6% confidence level (1-in-250 year event or 0.4% probability) on a net of reinsurance and after-tax basis. In addition to the 1-in-250 year modeled event, we evaluate the impact of a number of other scenarios on stockholders’ equity. 57 The table below shows the gross and net losses modeled results for (i) hurricane peril in our underwriting property portfolio, and (ii) the gross and net of reinsurance hurricane losses from the following scenarios: • • Recasts of two large hurricanes that impacted our geographic footprint: ◦ ◦ 1938 New England Hurricane, one of the largest hurricanes to impact the Northeast United States; and Hurricane Hazel, a Category 4 storm that made landfall near the border between North Carolina and South Carolina in 1954; and Realistic disaster scenarios (“RDS”) for significant potential storms in the Northeast and the Carolinas based on Lloyds of London methodology. Occurrence Exceedance Probability Hurricane ($ in thousands) 4.0% (1 in 25 year event) 2.0% (1 in 50 year event) 1.0% (1 in 100 year event) 0.67% (1 in 150 year event) 0.5% (1 in 200 year event) 0.4% (1 in 250 year event) 0.2% (1 in 500 year event) Historical recast - 1938 New England Hurricane Lloyd's RDS North-East (Category 4 hurricane) Historical recast - 1954 Hurricane Hazel Lloyd's RDS Carolinas (Category 5 hurricane) 1Gross losses include uncertainty associated with damage/loss estimation, demand and storm surge, and assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses, which collectively increase our gross losses by approximately 13%. 2Net losses are after-tax losses net of catastrophe reinsurance including reinstatement premiums based on the treaty structure effective January 1, 2023. 3GAAP stockholders' equity as of December 31, 2022. Net Losses % of Equity3 3 3 3 5 5 7 21 3 5 3 3 Gross Losses1 $212,267 354,977 575,734 818,907 906,745 1,041,355 1,504,757 452,577 825,960 282,257 483,327 Net Losses2 66,724 73,001 83,045 118,032 130,419 171,671 526,564 78,011 122,269 66,903 78,915 % As reflected in the table above, we are well within our established tolerance for catastrophic risk. Our current catastrophe reinsurance program exhausts at an approximately 1-in-220 year return period, or events with 0.5% probability, based on a multi-model view of hurricane risk. Our actual gross and net losses incurred from hurricanes making U.S.-landfall will vary, perhaps materially, from our estimated modeled losses. In addition to hurricane peril, the table below shows gross and net losses modeled by other wind and earthquake perils in our underwriting property portfolio. Occurrence Exceedance Probability Other Wind Earthquake ($ in thousands) 4.0% (1 in 25 year event) 2.0% (1 in 50 year event) 1.0% (1 in 100 year event) 0.67% (1 in 150 year event) 0.5% (1 in 200 year event) 0.4% (1 in 250 year event) 0.2% (1 in 500 year event) 1Gross losses include uncertainty associated with damage/loss estimation, demand and storm surge, and assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses, which collectively increase our gross losses by approximately 13%. 2Net losses are after-tax losses net of catastrophe reinsurance including reinstatement premiums based on the treaty structure effective January 1, 2023. 3GAAP stockholders' equity as of December 31, 2022. Net Losses % of Equity3 2 2 2 2 2 2 2 Net Losses % of Equity3 — 1 2 2 3 3 3 Gross Losses1 $7,681 $24,349 $72,657 $116,502 $147,880 $187,630 $273,747 Gross Losses1 $114,149 153,494 206,864 236,293 265,758 295,893 351,876 Net Losses2 $5,502 $16,566 $43,376 $54,125 $63,394 $63,238 $65,493 Net Losses2 47,782 50,526 52,843 57,050 57,548 58,486 61,968 % % As we currently do not write crop insurance, have minimal exposure to private flood, and have a small geographic footprint in the Western U.S., our exposures to perils, such as droughts, wildfires, and flooding, tend to be relatively modest. However, as our geographic expansion progresses, we continually evaluate how physical risks from these perils and others are considered in our strategic decision making. In addition, we regularly experience property losses from winter storms, and while we utilize third-party vendor models to help us model and manage our exposure to this peril, we also evaluate our winter storm exposure based on our own historical experience, as winter storm third-party vendor models are currently less mature. As an example of the impact from a large and recent winter storm, we incurred $135.0 million in gross losses from Winter Storm Elliott which took place in late-December 2022, or $46.1 million net of reinsurance. In addition, we incurred $11.7 million in reinstatement premium from Winter Storm 58 Elliott, resulting in a total impact of $57.8 million, pre-tax or $45.7 million after-tax. Despite the size of this event, our reinsurance strategy limited the impact on our full-year 2022 results to 1.8% of equity or a 1.7-point impact on our combined ratio. Based on our 2023 property catastrophe reinsurance program discussed above, if Winter Storm Elliott were to recur, the net impact to us would be more significant. We renewed the property excess of loss treaty, which covers both our standard market and E&S business, on July 1, 2022, with a $10 million increase in coverage in the highest layer. The treaty is comprised of three layers, with the $20 million in excess of $40 million layer effective January 1, 2022, being cancelled effective July 1, 2022. The following table summarizes of our property reinsurance treaties and arrangements covering our Insurance Subsidiaries: PROPERTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Property Catastrophe Excess of Loss (covers all insurance operations) Reinsurance Coverage $915 million above $60 million retention treaty that responds on per occurrence basis in four layers: - 47% of losses in excess of $60 million up to $100 million; - 100% of losses in excess of $100 million up to $225 million; - 100% of losses in excess of $225 million up to $525 million; and - 81% of losses in excess of $525 million up to $975 million. The treaty provides one reinstatement in each of the first three layers and no reinstatement in the fourth layer. The per occurrence limit is $810.1 million and the annual aggregate limit is $1.3 billion, net of the Insurance Subsidiaries' co- participation. Terrorism Coverage All nuclear, biological, chemical, and radioactive ("NBCR") losses are excluded regardless of whether or not they are certified under TRIPRA. Coverage for non-NBCR losses is limited due to current market conditions. Please see Item 1A. “Risk Factors.” of this Form 10-K for discussion regarding TRIPRA. Property Excess of Loss (covers all insurance operations) $67 million above $3 million retention covering 100% in three layers. Losses other than TRIPRA certified losses are subject to the following reinstatements and annual aggregate limits: - $7 million in excess of $3 million layer provides unlimited reinstatements; - $20 million in excess of $10 million layer provides three reinstatements, $80 million in aggregate limits; and - $40 million in excess of $30 million layer provides two reinstatements, $120 million in aggregate limits. All NBCR losses are excluded regardless of whether or not they are certified under TRIPRA. For non-NBCR losses, the treaty distinguishes between acts committed on behalf of foreign persons or foreign interests ("Foreign Terrorism") and those that are not. The treaty provides annual aggregate limits for Foreign Terrorism (other than NBCR) acts of $21 million for the first layer; $60 million for the second layer; and $40 million for the third layer. Non-foreign terrorism losses (other than NBCR) are covered to the same extent as non-terrorism losses. Flood 100% reinsurance by the federal government’s WYO. None Casualty Reinsurance We renewed the casualty excess of loss treaty, which covers both our standard market and E&S Lines business, on July 1, 2022, substantially on the same terms as the treaty expiring June 30, 2022. The following table summarizes our casualty reinsurance treaties and arrangements covering our Insurance Subsidiaries: CASUALTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Casualty Excess of Loss (covers all insurance operations) Reinsurance Coverage There are six layers covering 100% of $88 million in excess of $2 million. Losses other than terrorism losses are subject to the following: - $3 million in excess of $2 million layer provides 41 reinstatements, $126 million annual aggregate limit; Terrorism Coverage All NBCR losses are excluded. All other losses stemming from the acts of terrorism are subject to the following: - $3 million in excess of $2 million layer with $15 million net annual terrorism aggregate limit; - $7 million in excess of $5 million layer provides six reinstatements, $49 million annual aggregate limit; - $7 million in excess of $5 million layer with $28 million net annual terrorism aggregate limit; - $9 million in excess of $12 million layer provides three reinstatements, $36 million annual aggregate limit; - $9 million in excess of $12 million layer with $27 million net annual terrorism aggregate limit; - $9 million in excess of $21 million layer provides one reinstatement, $18 million annual aggregate limit; - $9 million in excess of $21 million layer with $18 million net annual terrorism aggregate limit; - $20 million in excess of $30 million layer provides one reinstatement, $40 million annual aggregate limit; and - $20 million in excess of $30 million layer with $40 million net annual terrorism aggregate limit; and - $40 million in excess of $50 million layer provides one reinstatement, $80 million annual aggregate limit. - $40 million in excess of $50 million layer with $80 million net annual terrorism aggregate limit. 59 We have other reinsurance treaties, such as our (i) Surety and Fidelity Excess of Loss Reinsurance Treaty, (ii) National Workers Compensation Reinsurance Pool Quota Share, which covers business assumed from the involuntary workers compensation pool, (iii) Endurance Specialty Quota share and Loss Development Cover, which protects against losses on policies written before the acquisition and any development on reserves established by MUSIC as of the date of acquisition, (iv) Equipment Breakdown Coverage Reinsurance Treaty, (v) Multi-line Quota Share, which covers additional personal lines coverages, such as personal cyber and home systems protection, (vi) Cyber Liability Quota Share, and (vii) Excess Liability Quota Share, which covers MUSIC's excess liability business. We regularly evaluate our overall reinsurance program and try to develop effective ways to manage the transfer of risk. We base our analysis on a comprehensive process that includes periodic analysis of modeling results, our own loss experience, aggregation of exposures, exposure growth, diversification of risks, limits written, projected reinsurance costs, reinsurer financial strength, and projected impact on earnings, equity, and statutory surplus. We strive to balance reinsurer credit quality, price, terms, and our appetite to retain a certain level of risk. Investments Segment Our investment portfolio's objectives are to maximize after-tax net investment income and generate long-term growth in book value per share by maximizing the overall total return of the portfolio by investing the premiums we receive from our insurance operations and the amounts generated through our capital management strategies, which may include debt and equity security issuances. We balance those objectives against prevailing market conditions, capital preservation considerations, and our enterprise risk-taking appetite. We maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity. The effective duration of the fixed income securities portfolio, including short-term investments, was 4.1 years as of December 31, 2022, compared to the Insurance Subsidiaries' net loss and loss expense reserves duration of 3.1 years. The effective duration is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. Purchases and sales are made with the intent of maximizing investment returns in the current market environment while balancing capital preservation. Our fixed income and short-term investments represented 92% of our invested assets at December 31, 2022, and 91% at December 31, 2021. These investments had a weighted average credit rating of “AA-” as of December 31, 2022 and "A+" as of December 31, 2021, with a 96% allocation to investment grade holdings at both December 31, 2022 and December 31, 2021. The improvement in our weighted average credit rating reflects active management of our investment portfolio in 2022 to optimize our risk-adjusted investment yields in the rising interest rate environment, which resulted in higher credit quality fixed income security purchases. For further details on the composition, credit quality, and the various risks to which our portfolio is subject, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K. Total Invested Assets ($ in thousands) Total invested assets Invested assets per dollar of common stockholders' equity Components of unrealized (losses) gains – before tax: Fixed income securities Equity securities Net unrealized (losses) gains - before tax Components of unrealized (losses) gains – after tax: Fixed income securities Equity securities Net unrealized (losses) gains - after tax 2022 2021 Change $ 7,837,469 3.37 8,026,988 2.88 (2) % 17 (527,892) (5,431) (533,323) (417,035) (4,290) (421,325) 228,962 26,696 255,658 180,880 21,090 201,970 (331) (120) (309) (331) (120) (309) Invested assets decreased $189.5 million at December 31, 2022, compared to December 31, 2021, reflecting a $789.0 million increase in pre-tax unrealized losses during 2022. The increase in pre-tax unrealized losses was primarily due to an increase in benchmark U.S. Treasury rates, and to a lesser extent the widening of credit spreads. This decrease in invested assets was partially offset by operating cash flows during 2022 that were 22% of NPW. 60 Net Investment Income The components of net investment income earned were as follows: ($ in thousands) Fixed income securities Commercial mortgage loans ("CMLs") Equity securities Short-term investments Alternative investments Other investments Investment expenses Net investment income earned – before tax Net investment income tax expense Net investment income earned – after tax Effective tax rate Annual after-tax yield on fixed income investments Annual after-tax yield on investment portfolio 2022 $ 259,918 5,555 13,554 3,997 23,003 258 (18,130) 288,155 55,956 $ 232,199 19.4 % 3.1 2.9 2021 209,709 2,743 15,920 260 117,701 359 (20,103) 326,589 63,589 263,000 19.5 2.6 3.4 2022 vs. 2021 24 % 103 (15) 1,437 (80) (28) 10 (12) (12) (12) (0.1) pts 0.5 (0.5) 2020 203,926 844 9,286 1,821 26,504 418 (15,692) 227,107 42,495 184,612 18.7 2.6 2.6 2021 vs. 2020 3 % 225 71 (86) 344 (14) (28) 44 50 42 0.8 pts — 0.8 Net investment income earned decreased 12% in 2022 compared to 2021, driven by lower returns on our alternative investments, reflecting lower valuations. Partially offsetting this decrease was an increase in income earned on fixed income securities. During 2022, we managed our fixed income securities portfolio to opportunistically increase the book yield in a rapidly rising interest rate environment. The pre-tax earned yield for fixed income investments was 3.90% in 2022, compared to 3.18% in 2021. The increase in investment income associated with fixed income securities was driven by (i) investing approximately $2.7 billion of new money, taking advantage of higher investment yields, and simultaneously improving credit quality and liquidity, and (ii) higher resets on our floating rate securities. The average pre-tax new purchase yield on fixed income securities in 2022 was 4.5%, up from 2.3% in 2021. In addition, as of December 31, 2022, 11% of our fixed income securities portfolio was invested in floating rate securities that reset principally to 90-day LIBOR. LIBOR increased 456 basis points in 2022 to 4.77% at December 31, 2022 from 0.21% at December 31, 2021, which increased the book yield on our floating rate securities and increased net investment income. Realized and Unrealized Investment Gains and Losses When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on economic evaluations of whether the fundamentals for that security or sector have deteriorated or the timing is appropriate to opportunistically trade for other securities with better economic-return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows: ($ in thousands) Net realized (losses) gains on disposals Net unrealized (losses) gains on equity securities Net credit loss (expense) on fixed income securities, AFS Net credit loss benefit (expense) on fixed income securities, HTM Net credit loss (expense) on CMLs Losses on securities for which we have the intent to sell Total net realized and unrealized investment (losses) gains 2022 2021 2020 $ $ (31,636) (32,127) (39,169) 63 (116) (11,823) (114,808) 7,144 17,881 (6,858) (49) — (519) 17,599 9,148 7,939 (5,042) 4 — (16,266) (4,217) Net realized and unrealized investment losses in 2022 were primarily driven by (i) a decrease in valuations reflecting the current public equities market, (ii) active trading of our fixed income securities to opportunistically increase yield in the rising interest rate environment, and (iii) higher credit loss expense on our AFS fixed income securities portfolio. For additional information regarding our losses on securities we intend to sell and our methodology for estimating the allowance for credit losses, see Note 2. “Summary of Significant Accounting Policies” and Note 5. "Investments" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 61 Federal Income Taxes The following table provides information regarding federal income taxes. ($ in millions) Federal income tax expense Effective tax rate1 1The effective tax rate is calculated by taking "Total federal income tax expense" divided by "Income before federal income tax" less "Preferred stock dividends" on our Consolidated Statements of Income. 55.3 20.4 % 101.5 20.5 2020 2021 2022 $ 56.6 18.7 Federal income tax expense decreased $46.2 million in 2022 compared to 2021, primarily due to a decrease in pre-tax income that is taxed at the statutory rate. The decrease in pre-tax income was primarily driven by (i) a decrease in underwriting income, (ii) lower net investment income earned, primarily due to lower returns on our alternative investments, and (iii) net realized and unrealized investment losses in 2022 compared to net realized and unrealized investment gains in 2021. See Note 14. “Federal Income Taxes” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K for: (i) a reconciliation of our effective tax rate to the statutory rate of 21%; and (ii) details regarding our net deferred tax asset and liability. Liquidity and Capital Resources Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet our operating and growth needs. Liquidity We manage liquidity by focusing on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We adjust our liquidity requirements based on economic conditions, market conditions, and future cash flow commitments, as discussed further below. Sources of Liquidity Sources of cash for the Parent historically have consisted of dividends from the Insurance Subsidiaries, the investment portfolio held at the Parent, borrowings under third-party lines of credit, loan agreements with certain Insurance Subsidiaries, and the issuance of equity (common or preferred) and debt securities. We continue to monitor these sources, considering our short-term and long-term liquidity and capital preservation strategies. The Parent’s investment portfolio includes (i) short-term investments generally maintained in “AAA” rated money market funds approved by the National Association of Insurance Commissioners, (ii) high-quality, highly-liquid government and corporate fixed income securities, (iii) equity securities, (iv) alternative investments, and (v) a cash balance. In the aggregate, Parent cash and total investments amounted to $484 million at December 31, 2022, and $527 million at December 31, 2021. The amount and composition of the Parent's investment portfolio may change over time based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, other Parent cash needs, such as dividends payable to stockholders, asset allocation investment decisions, inorganic growth opportunities, debt retirement, and share repurchases. Our target is for the Parent to maintain highly liquid investments of at least twice its expected annual net cash outflow needs, or $180 million. Insurance Subsidiary Dividends The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before paying claims. The period of float can extend over many years. Our investment portfolio consists of securities with maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of business. To protect our Insurance Subsidiaries' capital, we purchase reinsurance coverage for significantly large claims or catastrophes that may occur. The Insurance Subsidiaries paid $120 million in total dividends to the Parent in 2022. As of December 31, 2022, our allowable ordinary maximum dividend is $283 million for 2023. All Insurance Subsidiary dividends to the Parent are (i) subject to the approval and/or review of its domiciliary state insurance regulator and (ii) generally payable only from earned statutory surplus reported in its annual statements as of the preceding December 31. Although domiciliary state insurance regulators historically have approved dividends, there is no assurance they will approve future Insurance Subsidiary dividends. New Jersey corporate law also limits the maximum amount of dividends the Parent can pay our stockholders if either (i) the Parent would be unable to pay its debts as they become due in the usual course of business, or (ii) the Parent’s total assets 62 would be less than its total liabilities. The Parent’s ability to pay dividends to stockholders is also impacted by (i) covenants in its credit agreement that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period. For additional information regarding dividend restrictions and financial covenants, where applicable, see Note 11. “Indebtedness,” Note 17. “Equity,” and Note 22. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Line of Credit On November 7, 2022, the Parent entered into a Credit Agreement with the lenders named therein (the “Lenders”) and Wells Fargo Bank, National Association, as Administrative Agent ("Line of Credit"). Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility that can be increased to $125 million with the Lenders' consent. The Line of Credit will mature on November 7, 2025, and has a variable interest rate based on the Parent’s debt ratings. This agreement replaced a prior credit agreement that the Parent terminated in conjunction with entering into the Line of Credit. No borrowings were made under either credit facility in 2022. For additional information regarding the Line of Credit and corresponding representations, warranties, and covenants, refer to Note 11. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Four of the Insurance Subsidiaries are members of Federal Home Loan Bank ("FHLB") branches, as shown in the following table. Membership requires the ownership of branch stock and includes the right to access liquidity. All Federal Home Loan Bank of Indianapolis ("FHLBI") and Federal Home Loan Bank of New York ("FHLBNY") borrowings are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data.” of this Form 10-K. Branch FHLBI FHLBNY Insurance Subsidiary Member SICSC1 SICSE1 SICA SICNY 1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" because they are domiciled in Indiana. The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company’s admitted assets for the previous year. As SICNY is domiciled in New York, its FHLBNY borrowings are limited by New York insurance regulations to the lower of 5% of admitted assets for the most recently completed fiscal quarter, or 10% of admitted assets for the previous year-end. The following table provides information on the remaining capacity for FHLB borrowings based on these restrictions, as well as the additional FHLB stock purchase requirement to allow these member companies to borrow their remaining capacity amounts: ($ in millions) As of December 31, 2022 SICSC SICSE SICA SICNY Total Admitted Assets Borrowing Limitation Amount Borrowed Remaining Capacity Additional FHLB Stock Requirements $ 899.0 $ 715.8 3,356.4 625.6 $ 89.9 71.6 335.6 31.3 528.4 32.0 28.0 — — 60.0 57.9 43.6 335.6 31.3 468.4 1.2 0.9 15.1 1.4 18.6 Short-term Borrowings During 2022, SICA borrowed the following funds from the FHLBNY for general corporate purposes: • • $35 million on April 1, 2022 at an interest rate of 0.70% with repayment due on May 2, 2022. This borrowing was refinanced upon its maturity on May 2, 2022, at an interest rate of 1.10% and was subsequently repaid on June 27, 2022. $25 million on October 3, 2022 at an interest rate of 3.21%, which was repaid on November 3, 2022. 63 Intercompany Loan Agreements The Parent has lending agreements with the Indiana Subsidiaries approved by the Indiana Department of Insurance that provide additional liquidity. Similar to the Line of Credit, these lending agreements limit the Parent's borrowings from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. The following table provides information on the Parent’s borrowings and remaining borrowing capacity from the two Indiana Subsidiaries: ($ in millions) As of December 31, 2022 SICSC SICSE Total Admitted Assets as of December 31, 2022 Borrowing Limitation Amount Borrowed Remaining Capacity $ 899.0 $ 715.8 $ 89.9 71.6 161.5 24.0 16.0 40.0 65.9 55.6 121.5 Capital Market Activities The Parent had no private or public stock issuances during 2022. During 2022, we repurchased 165,159 shares of our common stock under our existing share repurchase program for $12.4 million, or a $75.20 average price per share, excluding commission costs paid. We had $84.2 million of remaining capacity under our share repurchase program as of December 31, 2022. For additional information on the preferred stock transaction, refer to Note 17. “Equity” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Uses of Liquidity The Parent's liquidity generated from the sources discussed above is used, among other things, to pay dividends to our stockholders. Dividends on shares of the Parent's common and preferred stock are declared and paid at the discretion of the Board based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. In November 2022, our Board approved a 7% increase in the quarterly cash dividend, to $0.30 from $0.28 per share. On February 2, 2023, our Board declared: • A quarterly cash dividend on common stock of $0.30 per common share, that is payable March 1, 2023, to holders of record on February 15, 2023; and • A cash dividend of $287.50 per share on our 4.60% Non-Cumulative Preferred Stock, Series B (equivalent to $0.28750 per depository share) payable on March 15, 2023, to holders of record as of February 28, 2023. Our ability to meet our interest and principal repayment obligations on our debt and our ability to continue to pay dividends to our stockholders is dependent on (i) liquidity at the Parent, (ii) the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or (iii) the availability of other sources of liquidity to the Parent. Our next FHLB borrowing principal repayment is $60 million to FHLBI due on December 16, 2026. Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common and preferred stock. Capital Resources Capital resources ensure we can pay policyholder claims, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At December 31, 2022, we had GAAP stockholders’ equity of $2.5 billion and statutory surplus of $2.5 billion. With total debt of $505 million at December 31, 2022, our debt-to-capital ratio was 16.6%. For additional information on our statutory surplus, see Note 22. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 64 The following table summarizes current and long-term material cash requirements as of December 31, 2022, which we expect to fund primarily with operating cash flows. Less than 1 year Payment Due by Period 1-3 years 3-5 years More than 5 years ($ in millions) Notes payable Interest on debt obligation Subtotal Gross loss and loss expense payments Ceded loss and loss expense payments Net loss and loss expense payments $ Total 510.0 565.3 1,075.3 5,144.8 757.5 4,387.3 — 28.3 28.3 1,571.9 305.8 1,266.1 — 56.6 56.6 1,633.8 170.7 1,463.1 Total $ 5,462.6 1,294.4 1,519.7 60.0 54.8 114.8 778.9 79.3 699.6 814.4 450.0 425.6 875.6 1,160.2 201.7 958.5 1,834.1 Our loss and loss expense payments in the table above represent estimated paid amounts by year on our loss and loss expense reserves. These estimates are based on past experience, adjusted for the effects of current developments and anticipated trends, and include considerable judgment. There is no precise method for evaluating the impact of any specific factor on the projected timing of loss and loss expense reserve payments, so the timing and amounts of the actual payments will be affected by many factors. Therefore, the projected settlement of the reserves for net loss and loss expense may differ, perhaps significantly, from actual future payments. For more information on our case reserves and estimates of reserves for loss and loss expense IBNR, refer to the “Reserves for Loss and Loss Expense” section in the "Critical Accounting Policies and Estimates" section of this MD&A and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. For additional information regarding cross-default provisions associated with our notes payable in the table above or our Line of Credit, see Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." in this Form 10-K. In addition to the above, the following table summarizes certain contractual obligations we had at December 31, 2022 that may require us to invest additional amounts into our investment portfolio, which we would fund primarily with operating cash flows. ($ in millions) Alternative investments Non-publicly traded collateralized loan obligations in our fixed income securities portfolio Non-publicly traded common stock within our equity portfolio CMLs Privately-placed corporate securities Total Amount of Obligation $ $ 246.1 106.6 35.0 4.9 20.1 412.7 There is no certainty (i) that any such additional investments will be required, and (ii) of the actual timing of funding. We expect to have the capacity to fund these commitments through our normal operating and investing activities as they come due. Our other cash requirements include, without limitation, dividends to stockholders, capital expenditures, and other operating expenses, including commissions to our distribution partners, labor costs, premium taxes, general and administrative expenses, and income taxes. As of December 31, 2022 and 2021, we had no (i) material guarantees on behalf of others and trading activities involving non- exchange traded contracts accounted for at fair value, (ii) material transactions with related parties other than those disclosed in Note 18. “Related Party Transactions” included in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K, and (iii) material relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Consequently, we are not exposed to any material financing, liquidity, market, or credit risk related to off-balance sheet arrangements. We continually monitor our cash requirements and the amount of capital resources we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics that support our targeted financial strength relative to the macroeconomic environment. Based on our analysis and market conditions, we may take a variety of actions, including, without limitation, contributing capital to the Insurance Subsidiaries, issuing additional debt 65 and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent’s common stock, and increasing common stockholders’ dividends. Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity. We have a profitable book of business and solid capital base, positioning us well to take advantage of potential market opportunities. Book value per common share decreased 17% to $38.57 as of December 31, 2022, from $46.24 as of December 31, 2021, driven by a $9.91 change in net unrealized losses on our fixed income securities portfolio and $1.14 in dividends to our common stockholders, partially offset by $3.54 in net income available to common stockholders per diluted common share. The increase in net unrealized losses on our fixed income securities was primarily driven by an increase in benchmark U.S. Treasury rates, and to a lesser extent the widening of credit spreads. Our adjusted book value per share, which is book value per share excluding total after-tax unrealized gains or losses on investments included in accumulated other comprehensive (loss) income, increased to $45.49 as of December 31, 2022, from $43.23 as of December 31, 2021. Cash Flows Net cash provided by operating activities of $802 million in 2022 reflected a modest 4% increase compared to $771 million in 2021, primarily driven by a 5% increase in total revenues. Operating cash flows during 2022 were 22% of NPW. Net cash used in investing activities increased to $734 million in 2022, compared to $619 million in 2021, primarily due to investing cash received from operating activities. A greater percentage of operating cash flows was used in our investing activities because of the reduced cash required in our financing activities. Net cash used in financing activities decreased to $88 million in 2022, compared to $123 million in 2021, primarily due to a decrease in borrowing repayments made in 2022, partially offset by increased dividends to common stockholders and increased activity in our share repurchase program in 2022. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market Risk The fair value of our assets and liabilities are subject to market risks — primarily interest rate risk, credit risk, equity price risk, and liquidity risk related to our investment portfolio — and fluctuations in the value of our alternative investment portfolio. Our portfolio allocation was 85% fixed income securities, 2% commercial mortgage loans, 2% equity securities, 5% short-term investments, 5% alternative investments, and 1% other investments as of December 31, 2022. Alternative investments are limited partnership investments in private equity, private credit, and real estate strategies. We do not directly hold derivatives, commodities, or other investments denominated in foreign currency. We have minimal foreign currency fluctuation risk within our alternative investment portfolio. For a discussion of our investment objective and philosophy, see the "Investments Segment" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. We manage our investment portfolio to mitigate risks associated with various financial market scenarios. We assume prudent risk to enhance our overall long-term results while managing a conservative, well-diversified investment portfolio to support our underwriting activities. Interest Rate Risk Investment Portfolio We invest in interest rate-sensitive securities, mainly fixed income securities. Our fixed income securities portfolio is comprised of primarily investment grade (investments receiving Standard & Poor's Global Ratings ("S&P") or an equivalent rating of BBB- or above) corporate securities, U.S. government and agency securities, municipal obligations, collateralized loan obligations ("CLO") and other asset-backed securities ("ABS"), and mortgage-backed securities ("MBS"). As of December 31, 2022, approximately 11% (15% at December 31, 2021) of our fixed income securities portfolio was floating rate securities, primarily tied to the 90-day U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). Our strategy to manage interest rate risk is to purchase intermediate-term fixed income investments that are attractively priced in relation to perceived credit risks. For more information on the upcoming transition away from LIBOR, refer to "Risks Related to our Investments Segment" in Item 1A. "Risk Factors." of this Form 10-K. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. Our fixed income securities portfolio contains interest rate-sensitive instruments, and its performance could be 66 adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. All else being equal, a rise in interest rates will decrease the fair value of our existing fixed income investments, and a decline in interest rates will increase the fair value of our existing fixed income investments. However, new and reinvested money used to purchase fixed income securities would benefit from rising interest rates and would be negatively impacted by falling interest rates. We seek to mitigate our interest rate risk associated with holding fixed income investments by monitoring and managing the effective duration of our portfolio to maximize yield while managing interest rate risk at an acceptable level. The effective duration of the fixed income securities portfolio, including short-term investments, at December 31, 2022, was 4.1 years, which is within our historical range. The Insurance Subsidiaries’ net loss and loss expense reserves duration was approximately 3.1 years at December 31, 2022. We use an interest rate sensitivity analysis to measure the potential loss or gain in future earnings, fair values, or cash flows of market sensitive fixed income securities. The sensitivity analysis hypothetically assumes an instant parallel 200 basis point shift in interest rates up and down in 100 basis point increments from the date of the Financial Statements. We use fair values to measure the potential loss. This analysis is not intended to provide a precise forecast, or range, of the effect of changes in market interest rates and equity prices on our income or stockholders’ equity, but rather provides insight into the portfolio's sensitivity. These calculations do not consider (i) any actions we may take in response to market fluctuations and (ii) changes to credit spreads, liquidity spreads, and other risk factors that may also impact the value of the fixed income securities portfolio. The following table presents the sensitivity analysis of interest rate risk as of December 31, 2022: ($ in thousands) Fixed income securities Fair value of fixed income securities portfolio Fair value change Fair value change from base (%) -200 2022 Interest Rate Shift in Basis Points 100 — -100 200 $ 7,187,341 545,397 6,914,779 272,835 8.2 % 4.1 % 6,641,944 6,369,000 (272,944) 6,096,178 (545,766) (4.1) % (8.2) % Credit Risk Our most significant credit risk is within our fixed income securities portfolio, which had an overall credit quality of “AA-” as of December 31, 2022, and “A+” as of December 31, 2021. Non-investment grade exposure represented approximately 4% of the total fixed income securities portfolio at both December 31, 2022 and December 31, 2021. The improvement in our weighted average credit rating reflects active management of our investment portfolio in 2022 to optimize our risk-adjusted investment yields in the rising interest rate environment, resulting in higher credit quality fixed income security purchases. 67 Details on the credit quality of our invested assets at December 31, 2022 are provided below: Amortized Cost Fair Value 440 $ 440 $ % of Yield to Invested Assets Worst 5.6 % 4.2 % Effective Duration in Years 0.01 Average Life in Years 0.01 AAA $ 420 AA $ 20 A $ — BBB $ — Non- Investment Grade — $ Not Rated $ — Credit Rating 210 11 969 2,586 189 10 921 2,361 2.4 0.1 11.8 30.2 809 360 1,170 737 323 1,060 9.4 4.1 13.5 664 614 7.9 1,833 1,674 21.4 30 58 867 8 644 1,608 3,441 29 48 809 8 592 1,486 3,160 0.4 0.6 10.3 0.1 7.6 19.0 40.4 4.6 5.2 3.8 5.8 4.7 5.8 5.1 6.5 5.6 8.5 11.4 7.6 6.2 6.8 7.4 6.4 7,807 7,222 92.3 5.7 5.1 6.7 5.0 4.6 5.9 4.5 5.5 3.3 4.7 1.8 2.9 2.1 3.1 4.1 2.9 3.8 4.1 187 7.5 8.2 — 181 6.1 41 6.3 8.6 7.1 8.2 737 213 949 4.3 523 6.8 1,472 29 1.9 3.5 — 386 5.2 7 3.5 155 5.2 578 5.1 6.0 2,050 2 2 419 270 — 35 35 44 79 — 1 261 — 91 354 433 — 5 286 974 — 76 76 42 117 — 20 47 1 277 345 462 — 2 37 916 — — — 5 5 — 22 38 — 55 114 120 — — — 160 — — — — — — 6 59 — 6 71 71 5.8 2,879 1,157 1,785 1,141 234 — — — — — — — — — — — 17 — 7 25 25 25 39.9 % 16.0 % 24.7 % 15.8 % 3.2 % 0.3 % 149 139 1.8 4.9 4.4 6.2 — 165 2 167 160 2 162 2 — 2.1 — — — — — — — — — — — — 11 — — — 58 — — — 67 — 2 2 December 31, 2022 ($ in millions) Short-term investments Fixed income securities: U.S. government obligations Foreign government obligations State and municipal obligations Corporate securities MBS: Residential mortgage-backed securities ("RMBS"): Agency RMBS Non-agency RMBS Total RMBS Commercial mortgage-backed securities ("CMBS") Total mortgage-backed securities CLO and other ABS: Auto Aircraft CLOs Credit cards Other ABS Total CLOs and Other ABS Total securitized assets Total fixed income securities and short-term investments Total fixed income securities and short-term investments by credit rating percentage Commercial mortgage loans Equity securities: Common stock1 Preferred stock Total equity securities Alternative investments: Private equity Private credit Real assets Total alternative investments 281 55 35 371 71 281 55 35 371 71 8,417 $ 7,826 3.6 0.7 0.5 4.7 0.9 100 % — % — — — — — — — — — — — — — — — — — — — — — — $ 2,879 $ 1,157 $ 1,785 $ 1,143 $ — — — — — — — — — — — — — — — Other investments Total invested assets 1Includes investments in exchange traded funds, mutual funds, business development corporations, and real estate investment trusts. Amounts may not foot due to rounding. $ On a quarterly basis, we review our invested assets for concentrations of credit risk. The sectors representing 10% or more of our invested assets at December 31, 2022 were (i) special revenue bonds within our state and municipal obligations portfolio (10%), (ii) the financial sector within corporate securities (15%), and (iii) collateralized loan obligations within our CLOs and other ABS portfolio (10%). We discuss each of these sector holdings in more detail below. 68 3 — — — — — — — — — 234 160 — 160 281 55 35 371 71 $ 628 State and Municipal Obligations Our state and municipal obligations represented 10% of our invested assets at December 31, 2022. The tables below provide details on this portfolio at December 31, 2022 and 2021: December 31, 2022 ($ in millions) General obligation state & local Special revenue Total state and municipal obligations December 31, 2021 ($ in millions) General obligation state & local Special revenue Total state and municipal obligations Fair Value Carry Value 148.6 772.8 921.4 148.6 772.8 921.4 Fair Value Carry Value 235.9 957.0 1,192.9 235.9 956.8 1,192.7 $ $ $ $ Net Unrealized/ Unrecognized Gain (Loss) (5.8) (40.4) (46.2) Net Unrealized/ Unrecognized Gain (Loss) 11.6 56.6 68.2 Weighted Average Credit Quality AA+ AA- AA- Weighted Average Credit Quality AA+ AA- AA- The following table details the top 10 state exposures of this portfolio at December 31, 2022: State Exposures of Municipal Bonds ($ in thousands) California New York Texas1 New Jersey Colorado Pennsylvania Ohio Massachusetts Florida Louisiana Other Pre-refunded/escrowed to maturity bonds Total $ General Obligation State & Local 35,541 5,730 36,115 — 1,142 — 2,090 5,315 — — 42,615 128,548 20,047 148,595 Special Revenue 68,934 84,090 36,312 60,662 38,127 37,699 31,155 26,131 29,718 28,669 274,131 715,628 57,200 772,828 Fair Value 104,475 89,820 72,427 60,662 39,269 37,699 33,245 31,446 29,718 28,669 316,746 844,176 77,247 921,423 % of Total 11% 10% 8% 7% 4% 4% 4% 3% 3% 3% 34% 92% 8% 100% Weighted Average Credit Quality A+ AA- AA A+ AA- AA- AA- AA AA- AA AA- AA- AAA AA- % of Total Municipal Portfolio % of Total Investment Portfolio 1Of the $36.1 million in state and local Texas general obligation bonds, $15.7 million represents investments in Texas Permanent School Fund bonds, which are considered to have lower risk as a result of the bond guarantee programs that support these bonds. 100 % 12 % 84 % 10 % 16 % 2 % Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) represented 10% of our total invested assets at December 31, 2022. These securities generally do not have the “full faith and credit” backing of the municipal or state governments, like general obligation bonds, but special revenue bonds have a dedicated revenue stream for repayment. For our special revenue bonds, 65% of the dedicated revenue stream is comprised of the following: (i) essential services (53%), which is comprised of transportation, water and sewer, and electric; and (ii) education (12%), which includes school districts and higher education, including state-wide university systems. Because of the quality of these dedicated revenue streams, we believe our special revenue bond portfolio is appropriate for the current environment. Corporate Securities Our corporate securities represented 30% of our invested assets at December 31, 2022. For investment-grade corporate bonds, we address the risk of an individual issuer's default by maintaining a diverse portfolio of holdings. The primary risk related to non-investment grade corporate bonds is credit risk. A weak financial profile can lead to credit rating downgrades, which can put further downward pressure on bond prices. Valuations on these bonds are related more directly to underlying operating performance than to general interest rates. Our holdings of non-investment grade corporate bonds, which typically exhibit weaker credit profiles and are subject to more risk of credit loss, represent 2% of our overall investment portfolio. 69 The tables below provide details on our corporate bond holdings at December 31, 2022 and 2021: December 31, 2022 ($ in millions) Investment grade Non-investment grade Total corporate securities December 31, 2021 ($ in millions) Investment grade Non-investment grade Total corporate securities Fair Value Carry Value 2,201.1 160.4 2,361.5 2,202.4 160.4 2,362.8 Fair Value Carry Value 2,424.8 174.6 2,599.4 2,424.3 174.6 2,598.9 $ $ $ $ Net Unrealized/ Unrecognized Gain (Loss) (189.8) (4.8) (194.6) Net Unrealized/ Unrecognized Gain (Loss) 100.0 2.5 102.5 Weighted Average Credit Quality A- B+ A- Weighted Average Credit Quality A- B+ BBB+ The following tables provide the sector composition of this portfolio at December 31, 2022 and 2021: ($ in millions) Financials Consumer non-cyclicals Communications Utilities Consumer cyclicals Technology Energy Bank loans Basic materials Other Other industrials Total corporate securities December 31, 2022 Weighted Average Credit Rating A- BBB+ A- A- BBB BBB+ BBB B BBB- A- BBB A- Fair Value 1,194.3 178.5 136.2 97.7 81.4 77.1 77.0 37.6 23.7 251.7 206.3 2,361.5 % of Fixed Income Securities Fair Value 18 % 3 % 2 % 1 % 1 % 1 % 1 % 1 % 0.3 % 4 % 3 % 35 1,286.9 242.8 133.3 123.7 101.6 95.6 94.2 57.3 33.0 188.6 242.4 2,599.4 December 31, 2021 Weighted Average Credit Rating A- BBB+ A- A- BBB BBB+ BBB B BBB- BBB+ BBB BBB+ % of Fixed Income Securities 19 % 4 % 2 % 2 % 1 % 1 % 1 % 1 % 1 % 3 % 4 % 39 As illustrated in the table above, within our allocation to corporate securities, financials is our most significant industry concentration at 18% of our fixed income securities portfolio at December 31, 2022. These holdings represented 15% of our total investment portfolio. The corporate securities portfolio allocation to financials is well-diversified by issuer and has a weighted average credit rating of “A-.” No individual issuer comprised more than 1% of our fixed income securities portfolio at December 31, 2022. MBS (RMBS and CMBS Portfolios) MBS represent our most significant exposure to real estate. Further breakdown of this exposure is provided in the table above that shows details on the credit quality of our invested assets. Agency RMBS represented approximately 70% of our RMBS allocation, and 9% of our total invested assets, as of December 31, 2022. These securities are rated “AAA" and had an unrealized loss of approximately $72.7 million, primarily due to an increase in benchmark U.S. Treasury rates, as of December 31, 2022. To manage and mitigate exposure on our RMBS and CMBS portfolios, we perform analyses both at the time of purchase and as part of the ongoing portfolio evaluation. These analyses includes review of loan-to-value ratios, geographic spread of the assets securing the bond, delinquencies in payments on the underlying mortgages, gains/losses on sales, evaluations of projected cash flows, as well as other information that aids in determination of the health of the underlying assets. We consider the overall credit environment, economic conditions, the investment's total projected return, and overall portfolio asset allocation in deciding to purchase or sell these securities. CLO and Other ABS Portfolio For CLO and other ABS, the primary risk is credit risk. We manage this risk by evaluating a number of factors, including the deal's structure, the credit quality of underlying loans or assets, the composition of the underlying portfolio, and the portfolio manager's track record and capabilities. We monitor key performance metrics, including over-collateralization, interest coverage, and cash flows, on an on-going basis. We consider the overall credit environment, economic conditions, the 70 investment's total projected return, and overall portfolio asset allocation when deciding to purchase or sell CLO and other ABS. Other ABS includes structured note obligations and securities collateralized by loans and other financial assets, including, without limitation, auto loans, credit card receivables, equipment leases, and student loans. The tables below provide details on our CLO and other ABS holdings at December 31, 2022, and December 31, 2021: December 31, 2022 ($ in millions) Investment grade: CLO Other ABS Total investment grade Non-investment grade: CLO Other ABS Total non-investment grade Total CLO and other ABS December 31, 2021 ($ in millions) Investment grade: CLO Other ABS Total investment grade Non-investment grade: CLO Other ABS Total non-investment grade Total CLO and other ABS Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality 732.6 658.0 1,390.6 76.1 19.3 95.4 1,486.0 732.6 658.0 1,390.6 76.1 19.3 95.4 1,486.0 (49.6) (60.9) (110.5) (6.9) (1.9) (8.8) (119.3) AA+ A+ AA B CCC+ B AA- Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality 788.6 475.9 1,264.5 69.8 16.5 86.3 1,350.8 788.6 475.9 1,264.5 69.8 16.5 86.3 1,350.8 2.6 5.9 8.5 (0.3) (0.2) (0.5) 8.0 AA+ A+ AA B CCC+ B AA- $ $ $ $ CLOs represented 10% of our total invested assets as of December 31, 2022. Investment grade CLOs accounted for the majority of this portfolio at 9% of invested assets, while non-investment grade CLOs represented only 1% of invested assets. The CLO portfolio is well diversified by issuer, manager, vintage year, and underlying corporate borrowers and sectors. No individual CLO comprised more than 1% of our fixed income securities portfolio at December 31, 2022, and this portfolio had an average credit quality of AA-. Equity Price Risk Our equity securities portfolio is exposed to risk from potential volatility in equity market prices. We attempt to minimize equity price risk exposure by maintaining a diversified portfolio and limiting concentrations in any one company or industry. The following table presents the hypothetical increases and decreases in 10% increments in the market value of the equity portfolio as of December 31, 2022: ($ in thousands) Fair value of equity securities portfolio Fair value change (30)% (20)% $ 113,400 (48,600) 129,600 (32,400) Change in Equity Values in Percent 10% 0% (10)% 178,200 162,000 16,200 145,800 (16,200) 20% 194,400 32,400 30% 210,600 48,600 In addition to our equity securities, we invest in alternative investments that are also subject to price risk. These are investments in private limited partnerships that invest in various strategies such as private equity, direct lending, mezzanine financing, distressed debt, infrastructure, and real estate. As of December 31, 2022, alternative investments represented 5% of our total invested assets and 15% of our stockholders’ equity. These investments are subject to the risks arising from the fact that their valuation is inherently subjective. The general partner of each of these partnerships usually reports the change in the value of the interests in the partnership on a one quarter lag because of the nature of the underlying assets or liabilities. Since these partnerships' underlying investments consist primarily of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in these partnerships are subject to a higher level of subjectivity 71 and unobservable inputs than substantially all of our other invested assets. Each of these general partners is required to determine the partnerships' value by the price obtainable for the sale of the interest at the time of determination. Valuations based on unobservable inputs are subject to greater scrutiny and reconsideration from one reporting period to the next, and therefore, may be subject to significant fluctuations, which could lead to significant decreases from one reporting period to the next. As we record our investments in these various partnerships under the equity method of accounting, any decreases in the valuation of these investments would negatively impact our results of operations. For additional information regarding these alternative investment strategies, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Liquidity Risk As a property and casualty insurer, we meet our liquidity needs generally through the cash flow provided by our on going operations, as premium collections and investment income generated from our portfolio provide a significant flow of cash to support policyholder claims and other payment obligations. Additionally, we purchase substantial reinsurance to mitigate exposure to significant loss events and we have access to various borrowing facilities if the need to raise capital were to arise. See the "Liquidity and Capital Resources" section in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for additional information regarding our available borrowing capacity. In addition to this, we monitor our investment portfolio's liquidity profile to ensure it meets our operational liquidity needs. The liquidity characteristics of our portfolio are illustrated below: Asset Category Highly-liquid assets Generally liquid assets, may become less liquid with market stress1 Generally illiquid assets2 Total 1These exposures are concentrated within CMBS and CLO and other ABS. 2These exposures include our alternative investments and other non-publicly traded securities. Percentage of Invested Assets 58 % 33 9 100 % Indebtedness (a) Long-Term Debt As of December 31, 2022, we had outstanding long-term debt of $504.7 million that matures as shown in the following table: ($ in thousands) Financial liabilities Long-term debt 3.03% Borrowings from FHLBI 7.25% Senior Notes 6.70% Senior Notes 5.375% Senior Notes Subtotal Unamortized debt issuance costs Finance lease obligations Total notes payable Year of Maturity Carrying Amount Fair Value 2022 2026 2034 2035 2049 60,000 49,921 99,542 294,424 503,887 (2,929) 3,718 504,676 $ 57,175 51,705 99,264 258,459 466,603 The weighted average effective interest rate for our outstanding long-term debt was 5.5% at December 31, 2022. Our debt is not exposed to material changes in interest rates because the interest rates are fixed. (b) Short-Term Debt On November 7, 2022, the Parent entered into a Credit Agreement (the “Line of Credit”) among the Parent, the lenders named therein (the “Lenders”), and Wells Fargo Bank, National Association, as Administrative Agent. Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility, which can be increased to $125 million with the consent of the Lenders. The Line of Credit will mature on November 7, 2025, and has a variable interest rate based on the Parent’s debt ratings. This agreement replaced a prior credit agreement that the Parent terminated in conjunction with entering into the Line of Credit. For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 11. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 72 Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Selective Insurance Group, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and subsidiaries (the Company) as of December 31, 2022 and December 31, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules I to V (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and December 31, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 10, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Estimate of reserve for loss and loss expense As discussed in Notes 2 and 10 to the consolidated financial statements, the Company estimates the reserve for loss and loss expense (reserves) through an internal reserve review that relies upon methods consistent with actuarial standards of practice supplemented with other internal and external information. The Company develops reserve estimates by line of business and, as experience emerges and other information develops, the reserve estimates are assessed in aggregate and adjusted as necessary. As of December 31, 2022, the Company recorded a liability of $5.14 billion for reserves. We identified the evaluation of the estimate of reserves for loss and loss expense as a critical audit matter. The process to evaluate the Company’s estimate of reserves involved a high degree of subjective auditor judgment due to the inherent uncertainties in adjusting past experience for current development and anticipating trends for predicting future events. 73 These uncertainties may be affected by a number of considerations, including internal factors, such as changes to underwriting and claim practices, and claim experience; as well as external factors, such as economic conditions, legislative enactments, judicial decisions, and social trends. Evaluating the impact of these factors on the estimate of reserves also required specialized actuarial skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. With the involvement of actuarial professionals, when appropriate, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s internal reserve review and determination of the Company’s best estimate of recorded reserves. We also involved actuarial professionals with specialized skills and knowledge, who assisted in: • • • • evaluating the Company’s actuarial methods by comparing them to methods consistent with actuarial standards of practice developing an independent estimate of reserves for certain lines of business using methods consistent with actuarial standards of practice for certain other lines of business, assessing the Company's internal reserve review by evaluating the assumptions and actuarial methods used developing a consolidated range of reserves and comparing it to the Company's recorded reserves assessing movement of the Company’s recorded reserves within the consolidated range of reserves. We have served as the Company's auditor since 1964. New York, New York February 10, 2023 /s/ KPMG LLP 74 Consolidated Balance Sheets December 31, ($ in thousands, except share amounts) ASSETS Investments: Fixed income securities, held-to-maturity – at carrying value (fair value: $29,837 – 2022; $29,460 – 2021) $ Less: allowance for credit losses Fixed income securities, held-to-maturity, net of allowance for credit losses Fixed income securities, available-for-sale – at fair value (allowance for credit losses: $45,721 – 2022; $9,724 – 2021; amortized cost: $7,185,754 – 2022; $6,490,753 – 2021) Commercial mortgage loans – at carrying value (fair value: $139,243 – 2022; $97,598 – 2021) Less: allowance for credit losses Commercial mortgage loans, net of allowance for credit losses Equity securities – at fair value (cost: $167,431 – 2022; $308,840 – 2021) Short-term investments Alternative investments Other investments Total investments (Notes 5 and 7) Cash Restricted cash Accrued investment income Premiums receivable Less: allowance for credit losses (Note 8) Premiums receivable, net of allowance for credit losses Reinsurance recoverable Less: allowance for credit losses (Note 9) Reinsurance recoverable, net of allowance for credit losses Prepaid reinsurance premiums (Note 9) Current federal income tax (Note 14) Deferred federal income tax (Note 14) Property and equipment – at cost, net of accumulated depreciation and amortization of: $251,209 – 2022; $253,427 – 2021 Deferred policy acquisition costs (Note 2) Goodwill (Note 12) Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Reserve for loss and loss expense (Note 10) Unearned premiums Long-term debt (Note 11) Deferred federal income tax (Note 14) Accrued salaries and benefits Other liabilities Total liabilities Stockholders’ Equity: Preferred stock of $0 par value per share (Note 17): $ $ $ 2022 2021 31,157 — 31,157 6,612,107 149,305 (116) 149,189 162,000 440,456 371,316 71,244 7,837,469 26 25,183 59,167 1,101,787 (16,100) 1,085,687 784,410 (1,600) 782,810 172,371 3,545 172,733 84,306 368,624 7,849 202,491 10,802,261 5,144,821 1,992,781 504,676 — 115,185 517,234 8,274,697 28,850 (65) 28,785 6,709,976 95,795 — 95,795 335,537 447,863 359,732 49,300 8,026,988 455 44,608 48,247 958,787 (13,600) 945,187 601,668 (1,600) 600,068 183,007 772 — 82,053 326,915 7,849 195,240 10,461,389 4,580,903 1,803,207 506,050 13,413 121,057 453,874 7,478,504 Authorized shares: 5,000,000; Issued shares: 8,000 with $25,000 liquidation preference per share – 2022 and 2021 $ 200,000 200,000 Common stock of $2 par value per share: Authorized shares 360,000,000 Issued: 104,847,111 – 2022; 104,450,916 – 2021 Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income (Note 6) Treasury stock – at cost (shares: 44,508,211 – 2022; 44,266,534 – 2021) Total stockholders’ equity Commitments and contingencies (Notes 19 and 20) Total liabilities and stockholders’ equity See accompanying Notes to Consolidated Financial Statements. 75 209,694 493,488 2,749,703 (498,042) (627,279) 2,527,564 208,902 464,347 2,603,472 115,099 (608,935) 2,982,885 $ 10,802,261 10,461,389 Consolidated Statements of Income December 31, ($ in thousands, except per share amounts) Revenues: Net premiums earned Net investment income earned Net realized and unrealized investment (losses) gains Other income Total revenues Expenses: Loss and loss expense incurred Amortization of deferred policy acquisition costs Other insurance expenses Interest expense Corporate expenses Total expenses 2022 2021 2020 $ 3,373,380 288,155 (114,808) 11,335 3,558,062 3,017,253 326,589 17,599 17,723 2,681,814 227,107 (4,217) 17,570 3,379,164 2,922,274 2,111,778 1,813,984 1,635,823 705,822 400,313 28,847 31,116 626,469 375,931 29,165 28,305 560,271 366,941 30,839 25,412 3,277,876 2,873,854 2,619,286 Income before federal income tax 280,186 505,310 302,988 Federal income tax expense: Current Deferred Total federal income tax expense Net income Preferred stock dividends Net income available to common stockholders Earnings per common share: Net income available to common stockholders - Basic Net income available to common stockholders - Diluted See accompanying Notes to Consolidated Financial Statements. 78,308 (23,008) 55,300 87,335 14,138 101,473 60,059 (3,426) 56,633 224,886 403,837 246,355 9,200 9,353 — 215,686 394,484 246,355 3.57 3.54 6.55 6.50 4.12 4.09 $ $ $ $ 76 Consolidated Statements of Comprehensive Income December 31, ($ in thousands) Net income 2022 2021 2020 $ 224,886 403,837 246,355 Other comprehensive (loss) income, net of tax: Unrealized (losses) gains on investment securities: Unrealized holding (losses) gains arising during year Unrealized losses on securities with credit loss recognized in earnings Amounts reclassified into net income: Held-to-maturity securities Net realized losses (gains) on disposals and losses on intent-to-sell available-for-sale securities Credit loss expense (527,805) (148,495) (119,598) (7,159) 3 47,438 30,944 (9) (3,022) 5,418 Total unrealized (losses) gains on investment securities (597,915) (124,370) 133,104 (6,459) (19) 4,247 3,984 134,857 Defined benefit pension and post-retirement plans: Net actuarial (loss) gain Amounts reclassified into net income: Net actuarial loss Total defined benefit pension and post-retirement plans Other comprehensive (loss) income Comprehensive (loss) income See accompanying Notes to Consolidated Financial Statements. (16,543) 17,093 1,197 1,317 (15,226) (613,141) (388,255) $ 2,190 19,283 (105,087) 298,750 2,382 3,579 138,436 384,791 77 Consolidated Statements of Stockholders’ Equity December 31, ($ in thousands, except share and per share amounts) Preferred stock: Beginning of year Issuance of preferred stock End of year Common stock: Beginning of year Dividend reinvestment plan Stock purchase and compensation plans End of year Additional paid-in capital: Beginning of year Dividend reinvestment plan Preferred stock issuance costs Stock purchase and compensation plans End of year Retained earnings: Beginning of year, as previously reported Cumulative effect adjustment due to adoption of guidance on allowance for credit losses, net of tax Balance at beginning of year, as adjusted Net income Dividends to preferred stockholders Dividends to common stockholders End of year Accumulated other comprehensive income: Beginning of year Other comprehensive (loss) income End of year Treasury stock: Beginning of year Acquisition of treasury stock - share repurchase authorization Acquisition of treasury stock - shares acquired related to employee share-based compensation plans End of year Total stockholders’ equity Dividends declared per preferred share Dividends declared per common share Preferred stock, shares outstanding: Beginning of year Issuance of preferred stock End of year 2022 2021 2020 $ 200,000 — 200,000 208,902 44 748 209,694 464,347 1,784 — 27,357 493,488 200,000 — 200,000 208,066 46 790 208,902 438,985 1,707 — 23,655 464,347 — 200,000 200,000 206,968 58 1,040 208,066 418,521 1,645 (5,416) 24,235 438,985 2,603,472 — 2,603,472 224,886 (9,200) (69,455) 2,749,703 2,271,537 — 2,271,537 403,837 (9,353) (62,549) 2,603,472 2,080,529 1,435 2,081,964 246,355 — (56,782) 2,271,537 115,099 (613,141) (498,042) 220,186 (105,087) 115,099 81,750 138,436 220,186 $ $ $ (608,935) (12,424) (5,920) (627,279) (599,885) (3,404) (5,646) (608,935) (592,832) — (7,053) (599,885) 2,527,564 2,982,885 2,738,889 1,150.00 1.14 1,169.17 1.03 8,000 — 8,000 8,000 — 8,000 — 0.94 — 8,000 8,000 Common stock, shares outstanding: Beginning of year Dividend reinvestment plan Stock purchase and compensation plan Acquisition of treasury stock - share repurchase authorization Acquisition of treasury stock - shares acquired related to employee share-based compensation plans End of year 60,184,382 22,093 374,102 (165,159) (76,518) 60,338,900 59,905,803 22,986 395,018 (52,781) (86,644) 60,184,382 59,461,153 28,890 519,863 — (104,103) 59,905,803 See accompanying Notes to Consolidated Financial Statements. 78 Consolidated Statements of Cash Flows December 31, ($ in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Stock-based compensation expense Undistributed gains of equity method investments Distributions in excess of current year income of equity method investments Net realized and unrealized losses (gains) Loss on disposal of fixed assets Changes in assets and liabilities: Increase in reserve for loss and loss expense, net of reinsurance recoverable Increase in unearned premiums, net of prepaid reinsurance (Increase) decrease in net federal income taxes Increase in premiums receivable Increase in deferred policy acquisition costs Increase in accrued investment income (Decrease) increase in accrued salaries and benefits Increase in other assets Increase in other liabilities Net cash provided by operating activities Investing Activities Purchases of fixed income securities, held-to-maturity Purchases of fixed income securities, available-for-sale Purchases of commercial mortgage loans Purchases of equity securities Purchases of alternative investments and other investments Purchases of short-term investments Sales of fixed income securities, available-for-sale Proceeds from commercial mortgage loans Sales of short-term investments Redemption and maturities of fixed income securities, held-to-maturity Redemption and maturities of fixed income securities, available-for-sale Sales of equity securities Sales of other investments Distributions from alternative investments and other investments Purchases of property and equipment Net cash used in investing activities Financing Activities Dividends to preferred stockholders Dividends to common stockholders Acquisition of treasury stock Net proceeds from stock purchase and compensation plans Preferred stock issued, net of issuance costs Proceeds from borrowings Repayment of borrowings Repayment of finance lease obligations Net cash (used in) provided by financing activities Net (decrease) increase in cash and restricted cash Cash and restricted cash, beginning of year Cash and restricted cash, end of year See accompanying Notes to Consolidated Financial Statements. $ 79 2022 2021 2020 $ 224,886 403,837 246,355 42,336 18,428 (12,946) 43,184 114,808 172 381,176 200,210 (25,932) (140,500) (41,709) (10,920) (3,092) (37,561) 49,869 802,409 (6,691) (2,648,974) (64,008) (26,675) (73,408) (4,506,500) 1,211,739 10,498 4,513,940 4,351 669,211 186,144 3,281 18,664 (26,019) (734,447) (9,200) (66,920) (18,344) 9,086 — 60,000 (60,000) (2,438) (87,816) (19,854) 45,063 25,209 55,109 15,893 (69,873) 2,910 (17,599) 50 307,972 172,460 (542) (109,173) (38,337) (3,243) 7,216 (33,379) 78,121 771,422 (16,250) (2,165,555) (50,204) (88,640) (85,044) (4,345,140) 502,911 714 4,306,684 4,192 1,217,555 99,235 5,428 17,497 (22,163) (618,780) (9,353) (60,136) (9,050) 7,976 (479) — (50,000) (1,768) (122,810) 29,832 15,231 45,063 59,350 16,227 (12,408) 3,472 4,217 22 181,839 91,278 7,708 (13,171) (17,392) (158) (13,264) (27,927) 27,897 554,045 — (1,723,818) (46,506) (230,813) (79,598) (5,762,725) 487,087 201 5,635,463 3,888 1,019,132 1,320 5,375 24,884 (22,064) (688,174) — (54,486) (7,053) 8,411 195,063 587,000 (587,000) (550) 141,385 7,256 7,975 15,231 Notes to Consolidated Financial Statements Note 1. Organization Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard commercial, standard personal, and excess and surplus ("E&S") lines property and casualty insurance products. Selective Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its corporate headquarters is located in Branchville, New Jersey. The Parent’s common and preferred stock are publicly traded on the Nasdaq Global Select Market under the symbols “SIGI” and "SIGIP," respectively. We have provided a glossary of terms as Exhibit 99.1 to this Form 10-K, which defines certain industry-specific and other terms that are used in this Form 10-K. We classify our business into four reportable segments, which are as follows: • • • • Standard Commercial Lines – comprised of property and casualty insurance products and services provided in the standard marketplace to commercial enterprises, which are typically businesses, non-profit organizations, and local government agencies. Standard Personal Lines – comprised of property and casualty insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace. E&S Lines – comprised of property and casualty insurance products and services provided to customers who are unable to obtain coverage in the standard marketplace. Investments – invests the premiums collected by our insurance operations, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities. Note 2. Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements (“Financial Statements”) include the accounts of the Parent and its subsidiaries, and have been prepared in conformity with: (i) United States ("U.S.") generally accepted accounting principles ("GAAP"); and (ii) the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions are eliminated in consolidation. (b) Use of Estimates The preparation of our Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported financial statement balances, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (c) Investments Portfolio Composition and Presentation in the Consolidated Balance Sheet Our investment portfolio is primarily comprised of fixed income investments. We also hold commercial mortgage loans ("CMLs"), equity securities, short-term investments, alternative investments, and other investments. A description of our portfolio holdings, and the related presentation in our Consolidated Balance Sheet, is provided below. Fixed Income Investments Our fixed income investments include our fixed income securities portfolio and our CML portfolio. Fixed Income Securities We hold the following types of securities in our fixed income securities portfolio: • • • • • • • U.S. government and government agency obligations; Foreign government obligations; Obligations of states and political subdivisions, including special revenue and general obligation bonds; Corporate securities, which may include investment grade and below investment grade bonds, bank loan investments, redeemable preferred stock, and non-redeemable preferred stock with certain debt-like characteristics; Collateralized loan obligations ("CLOs") and other asset-backed securities ("ABS"); Residential mortgage-backed securities ("RMBS"); and Commercial mortgage-backed securities ("CMBS"). 80 We have designated substantially all of the holdings in our fixed income securities as available-for-sale ("AFS"). These securities are reported at fair value in our Consolidated Balance Sheet. The after-tax difference between fair value and cost or amortized cost is reflected in stockholders’ equity as a component of accumulated other comprehensive (loss) income ("AOCI"). The amortized cost of fixed income securities is adjusted for the amortization of premiums and the accretion of discounts over the expected life of the security using the effective yield method. Callable debt securities held at a premium are amortized to the earliest call date. Premiums and discounts arising from the purchase of RMBS, CMBS, CLO and other ABS are amortized over the expected life of the security based on future principal payments, giving additional consideration to prepayments. These prepayments are estimated based on historical and projected cash flows. Prepayment assumptions are reviewed quarterly and adjusted to reflect actual prepayments and changes in expectations. Future amortization of any premium and/or discount is adjusted to reflect the revised assumptions. Accrued interest on our fixed income securities is recorded as a component of “Accrued investment income” on our Consolidated Balance Sheet. If accrued interest is due but not paid within 90 days, we reverse the delinquent amount and record this reversal through earnings as a component of “Net investment income earned” on our Consolidated Statement of Income. CMLs CMLs are loans secured by commercial property, such as an office building, multi-family apartment complex, industrial warehouse, or shopping center. We may acquire investments in CMLs through (i) direct originations under a loan syndication arrangement or (ii) a marketplace purchase. We record our investment in CMLs on the settlement date of the loan. Our CMLs are reported at amortized cost, net of any allowance for credit losses ("ACL"), on our Consolidated Balance Sheet. Interest is recorded using the effective yield method and accrued interest on our CMLs is recorded as a component of “Accrued investment income” on our Consolidated Balance Sheet. Other Portfolio Holdings Equity securities may include common and non-redeemable preferred stocks. Equity securities with readily determinable fair values are reported at fair value. Equity securities without readily determinable fair values are reported at net asset value ("NAV") as a practical expedient. Short-term investments may include money market instruments, savings accounts, commercial paper, and fixed income securities purchased with a maturity of less than one year. We may also enter into reverse repurchase agreements that are included in short-term investments. These repurchase agreements are fully collateralized by high-quality, readily-marketable instruments that support the principal amount. At maturity, we receive principal and interest income on these agreements. Short-term investments are generally reported at fair value. Alternative investments are limited partnership investments in private equity, private credit, and real estate strategies. These alternative investments are accounted for using the equity method, with income typically recognized on a one-quarter lag. Because these alternative investments are recorded under the equity method of accounting, with the underlying holdings carried at fair value, the valuation and income recognized on these investments may be impacted by volatility in the financial markets. We categorize distributions from our equity method on our Consolidated Statement of Cash Flows using the cumulative earnings approach. Under this approach, distributions received are classified as cash flows from operating activities until such time that the cumulative distributions exceed cumulative earnings for the investment. When such an excess occurs, the excess portion of the current period distribution is considered a return of investment and is classified as a cash flow from investing activities. We evaluate our alternative investments to determine whether those investments are variable interest entities ("VIEs") and if so, whether consolidation is required. A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest or lack sufficient funds to finance its own activities without financial support provided by other entities. We consider several significant factors in determining if our investments are VIEs and if we are the primary beneficiary, including whether we have (i) the power to direct activities of the VIE, (ii) the ability to remove the decision maker of the VIE, (iii) the ability to participate in making decisions that are significant to the VIE, and (iv) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE. We have reviewed our alternative investments and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required. 81 Our other investment portfolio includes Federal Home Loan Bank stock (“FHLB Stock”) and tax credit investments. The FHLB Stock is reported at cost. Accounting for our tax credit investments is dependent on the type of credit we have purchased, as follows: • • Federal low income housing tax credits are accounted for under the proportional amortization method; and All other tax credits in our investment portfolio are accounted for using the equity method. For federal tax credits accounted for under the equity method, we use the deferral method for recognizing the benefit of the tax credit with the related deferred revenue being recognized in our Consolidated Income Statement as a component of "Federal income tax expense" proportionately over the life of the investment. Presentation in the Consolidated Statement of Income Net Investment Income Earned Net investment income earned on our Consolidated Statement of Income includes the following: • • • • • Interest income, as well as amortization and accretion, on fixed income securities; Interest income on CMLs; Dividend income on equity securities; Interest income on our short-term investments; and Income recognized on our alternative and other investments accounted for under the equity method of accounting, except for federal tax credits, as discussed below. Income related to federal tax credits (either low income housing tax credits or other federal credits) is recorded in our Consolidated Statement of Income as a component of “Federal income tax expense” proportionately over the life of the investment. Net Realized and Unrealized Investment (Losses) Gains Net realized and unrealized investment (losses) gains on our Consolidated Statement of Income include the following: • • • • Realized gains and losses on the disposal of holdings in our investment portfolio, which are determined on the basis of the cost of the specific investments sold; Changes in unrealized gains or losses on our equity securities; Losses on investments for which we have the intent to sell, which are discussed further below; and Net credit loss expense or benefit resulting from changes in the ACL related to our investment portfolio, which is also discussed further below. Losses on Investments for which we have the Intent to Sell For our AFS fixed income securities and short-term investments, we review our fixed income securities in an unrealized loss position to determine (i) if we have the intent to sell the security, or (ii) if it is more likely than not we will be required to sell the security before its anticipated recovery. If we determine that we have the intent or likely requirement to sell the security, we write down its amortized cost to its fair value. In writing down amortized cost, any amount previously recorded as an ACL is reversed and any incremental reduction in amortized cost is recorded directly to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. For our alternative and other investments, if we determine that we intend to sell a holding and the expected proceeds are less than the recorded value of the investment, we will record a loss on those securities we intend to sell in earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. After reviewing our portfolio, if (i) we do not have the intent to sell, or (ii) it is more likely than not we will not be required to sell the security before its anticipated recovery, then our intent is to hold the investment securities to maturity and recover the decline in valuation as prices accrete to par. However, our intent may change prior to maturity due to certain types of events, which include, but are not limited to, changes in the financial markets, our analysis of an issuer’s credit metrics and prospects, changes in tax laws or the regulatory environment, or as a result of significant unforeseen changes in liquidity needs. As such, we may, from time to time, sell invested assets subsequent to the balance sheet date that we did not intend to sell at the balance sheet date. Conversely, we may not sell invested assets that we asserted we intended to sell at the balance sheet date. Such changes in intent are due to events occurring subsequent to the balance sheet date. ACL on AFS Fixed Income Securities and Short-Term Investments When fixed income securities are in an unrealized loss position and we do not record any losses on securities for which we intend to sell, we record an ACL for the portion of the unrealized loss due to an expected credit loss. We estimate expected 82 credit losses on fixed income securities by performing a discounted cash flow (“DCF”). The ACL is equal to the excess of amortized cost over the greater of: (i) our estimate of the present value of expected future cash flows, or (ii) fair value. The ACL is recorded as a contra-asset reflected in the carrying value of the investment on the Consolidated Balance Sheet. The initial ACL and any subsequent changes are recorded to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. Any remaining unrealized loss is the non-credit amount and is recorded in AOCI. The ACL cannot exceed the unrealized loss of an AFS security and therefore it may fluctuate with changes in the fair value of the security. The ACL is written off against the amortized cost basis in the period in which it is determined uncollectible. Our DCF analyses calculate the present value of expected future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information, as well as reasonable and forecasted macroeconomic data, to determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated into the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. The discount rate used in a DCF is one of the following: • • • The current yield in effect at the reporting date to accrete the beneficial interest for RMBS, CMBS, CLO and other ABS that were not of high credit quality at acquisition; The effective interest rate in effect as of the reporting date for non-fixed rate securities; and The effective interest rate implicit in the security at the date of acquisition for all other securities. DCFs may include, but are not necessarily limited to: (i) generating cash flows for each tranche considering tranche-specific data, market data, and other pertinent information, such as the historical performance of the underlying collateral, including net operating income generated by underlying properties, conditional default rate assumptions, loan loss severity assumptions, consensus projections, prepayment projections, and actual pool and collateral information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche specific spreads to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and offers. We do not record a valuation allowance on the accrued interest balance associated with our fixed income securities as we reverse delinquent amounts on a timely basis. We consider a fixed income security to be past due at the time any principal or interest payments become 90 days delinquent. ACL on CMLs We evaluate our CMLs on a quarterly basis for expected credit losses. If we hold a CML with a specific credit concern, we record an individual ACL on that loan. For all other CMLs, we record an ACL on the pool of loans based on lifetime expected credit losses. The ACL is recorded as a contra-asset reflected in the carrying value of our CMLs on the Consolidated Balance Sheet. Our initial ACL and any subsequent changes are recorded to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. We utilize a forecasting model to estimate lifetime expected credit losses at a loan level under multiple economic scenarios. The scenarios apply reasonable and forecasted macroeconomic data such as unemployment, inflation, and rent assumptions to project property-specific operating income and capitalization rates that are used to estimate the value of the future operating income stream. This information, coupled with historical data about mortgage loan performance, is used to project the probability of default, the amount of loss given a default, and the resulting lifetime expected loss. Credit Losses on Alternative Investments We review our alternative investment portfolio for potential credit losses through quarterly fund reports and conversations with the general partners of the alternative investments concerning the following: • • • • The current investment strategy; Changes made or future changes to be made to the investment strategy; Emerging issues that may affect the success of the strategy; and The appropriateness of the valuation methodology used regarding the underlying investments. Credit Losses on Other Investments Our evaluation for potential credit loss on tax credits and FHLB Stock include a qualitative assessment of credit indicators, which include, but are not limited to, the following: • • An adverse development of the expected receipt of remaining tax credits and other tax benefits; and A significant deterioration in the financial condition or liquidity of the Federal Home Loan Bank. 83 If we do not intend to sell a security, and we expect a credit loss on a holding in our alternative or other investments portfolio, we record a charge to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. (d) Fair Values of Financial Instruments Assets The fair values of our investments are generated using various valuation techniques and are placed into the fair value hierarchy considering the following: (i) the highest priority is given to quoted prices in active markets for identical assets (Level 1); (ii) the next highest priority is given to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets in markets that are not active and other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets (Level 2); and (iii) the lowest priority is given to unobservable inputs supported by little or no market activity and that reflect our assumptions about the exit price, including assumptions that market participants would use in pricing the asset (Level 3). An asset’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The techniques used to value our financial assets are as follows: Level 1 Pricing Security Type Equity Securities; U.S. Treasury Notes Short-Term Investments Methodology Equity and U.S. Treasury Note prices are received from an independent pricing service that are based on observable market transactions. We validate these prices against a second external pricing service, and if established market value comparison thresholds are breached, further analysis is performed to determine the price to be used. Short-term investments are recorded at fair value. Given the liquid nature of our short-term investments, we generally validate their fair value by way of active trades within approximately one week of the financial statement close. Level 2 Pricing We utilize a market approach for our Level 2 securities, using primarily matrix pricing models prepared by external pricing services. Matrix pricing models use mathematical techniques to value fixed income securities by relying on the securities' relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service. Fixed income security pricing is reviewed for reasonableness by (i) comparing our pricing to other third-party pricing services as well as benchmark indexed pricing, (ii) comparing fair value fluctuations between months for reasonableness, (iii) reviewing stale prices, and (iv) internally reviewing prices for reasonableness if a price from another third-party source is not available. If further analysis is needed, a challenge is sent to the pricing service for review and confirmation of the price. 84 Further information on our Level 2 asset pricing is included in the following table: Security Type Methodology Corporate Securities, including preferred stocks classified as Fixed Income Securities, and U.S. Government and Government Agencies Obligations of States and Political Subdivisions RMBS, CMBS, CLO and other ABS Evaluations include obtaining relevant trade data, benchmark quotes and spreads, and incorporating this information into either spread-based or price-based evaluations as determined by the observed market data. Spread-based evaluations include: (i) creating a range of spreads for relevant maturities of each issuer based on the new issue market, secondary trading, and dealer quotes; and (ii) incorporating option adjusted spreads for issues that have early redemption features. Based on the findings in (i) and (ii) above, final spreads are derived and added to benchmark curves. Price-based evaluations include matching each issue to its best-known market maker and contacting firms that transact in these securities. Evaluations are based on yield curves that are developed based on factors such as: (i) benchmarks to issues with interest rates near prevailing market rates; (ii) established trading spreads over widely-accepted market benchmarks; (iii) yields on new issues; and (iv) market information from third-party sources such as reportable trades, broker-dealers, or issuers. Evaluations are based on a DCF, including: (i) generating cash flows for each tranche considering tranche-specific data, market data, and other pertinent information, such as historical performance of the underlying collateral, including net operating income generated by the underlying properties, conditional default rate assumptions, loan loss severity assumptions, consensus projections, prepayment projections, and actual pool and loan level collateral information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche-specific spreads to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and offers. Foreign Government Evaluations are performed using a DCF model and by incorporating observed market yields of benchmarks as inputs, adjusting for varied maturities. Level 3 Pricing Security Type CMLs Methodology Evaluations are performed by a third-party and are based on matrix pricing. For fixed rate loans, the matrix process uses a yield build up approach to create a pricing yield, with components for base yield, credit quality spread, property type spread, and a weighted average life spread. Floating rate loans are priced with a target quality spread over the swap curve. In addition to our CML portfolio, certain securities in our AFS fixed income portfolio are priced using unobservable inputs. These valuations are primarily based on broker quotes, or they are received from other third-party sources, for which there is a lack of transparency as to the inputs used to generate the valuation. The quantitative detail of these unobservable inputs is neither provided to us, nor reasonably available to us. Liabilities The techniques used to value our notes payable are as follows: Level 2 Pricing Security Type 7.25% Senior Notes; 6.70% Senior Notes; 5.375% Senior Notes Based on matrix pricing models prepared by external pricing services. Methodology Borrowings from Federal Home Loan Banks Evaluations are performed using a DCF model based on current borrowing rates provided by the Federal Home Loan Banks that are consistent with the remaining term of the borrowing. (e) Allowance for Credit Losses on Premiums Receivable We estimate an ACL on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable, based on the effective year of the related policy, along with our historical receivable loss experience. We also contemplate expected macroeconomic conditions over the expected collection period, which are short-term in nature because the majority of the balances are collected within two years of policy issuance. Changes in our ACL are charged to earnings as credit loss expense or benefit, which is a component of "Other insurance expenses" on our Consolidated Statements of Income, with an offsetting ACL recorded as a contra-asset reflected in the 85 carrying value of the receivable. We charge write-offs against the allowance when we determine the account to be uncollectible after considering information obtained from our collection efforts. (f) Share-Based Compensation Share-based compensation consists of all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share units, share options, or other equity instruments. The cost resulting from all share- based payment transactions are recognized in the Financial Statements based on the fair value of both equity and liability awards. The fair value is measured at grant date for equity awards, whereas the fair value for liability awards are remeasured at each reporting period. The fair value of both equity and liability awards is recognized over the requisite service period. The requisite service period is typically the lesser of the vesting period or the period of time from the grant date to the date of retirement eligibility. The expense recognized for share-based awards, which, in some cases, contain performance criteria, is based on the number of shares or units expected to be issued at the end of the performance period. We repurchase the Parent’s stock from our employees in connection with tax withholding obligations, as permitted under our stock-based compensation plans. This activity is disclosed in our Consolidated Statement of Stockholders' Equity. (g) Reinsurance The “Reinsurance recoverable” balance on our Consolidated Balance Sheet represents our estimate of amounts that will be recovered from reinsurers under our various treaties. Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. We would consider a recoverable balance from a reinsurer to be past due if payment is not received by the first day following the invoice due date. We require collateral to secure reinsurance recoverable balances primarily from our reinsurance carriers that are not authorized, otherwise approved, or certified to do business in one or more of our ten insurance subsidiaries' domiciliary states. Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries." The collateral received is typically in the form of a letter of credit, trust funds, or funds withheld against reinsurance recoverables. We estimate an ACL on our outstanding reinsurance recoverable balance at each reporting date. Credit risk is mitigated to the extent we have obtained collateral. As part of our estimation of the ACL, we reduce the recoverable balance by the amount of the collateral. We then pool the uncollateralized balances by similar risk characteristics, including the financial strength rating of the reinsurer, and use a probability-of-default methodology to calculate the allowance. Historical default rates are sourced from AM Best Company ("AM Best") and are coupled with severity assumptions in developing a baseline scenario. We then stress this scenario by incorporating forecasts of industry catastrophe losses and economic factors sourced through third-party data providers. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring. Changes in our ACL are charged to earnings as credit loss expense, which is a component of “Loss and loss expense incurred” on our Consolidated Statement of Income, with an offsetting ACL recorded as a contra-asset reflected in the carrying value of the recoverable balance. We charge write-offs against the ACL when we determine the recoverable balance to be uncollectible after considering information obtained from our efforts to collect amounts due or through a review of the financial condition of the reinsurer. (h) Property and Equipment Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The following estimated useful lives can be considered as general guidelines: Asset Category Computer hardware Computer software Software licenses Internally developed software Furniture and fixtures Buildings and improvements Years to to to 3 5 5 5 10 40 3 3 5 We recorded depreciation expense of $24.6 million, $24.3 million, and $21.5 million for 2022, 2021, and 2020, respectively. (i) Deferred Policy Acquisition Costs Deferred policy acquisition costs are limited to costs directly related to the successful acquisition of insurance contracts. Costs meeting this definition typically include, among other things, sales commissions paid to our distribution partners, premium 86 taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. These costs are deferred and amortized over the life of the contracts. Accounting guidance requires a premium deficiency analysis to be performed at the level an entity acquires, services, and measures the profitability of its insurance contracts. We currently perform three premium deficiency analyses for our insurance operations, consistent with our reportable segments of Standard Commercial Lines, Standard Personal Lines, and E&S Lines. A combined ratio of over 100% does not necessarily indicate a premium deficiency, as any year's combined ratio includes a portion of underwriting expenses that are expensed at policy inception and therefore are not covered by the remaining unearned premium. In addition, investment income is not contemplated in the combined ratio calculation. There were no premium deficiencies for any of the reported years, as the sum of the anticipated loss and loss expense, unamortized acquisition costs, policyholder dividends, and other expenses for each segment did not exceed that segment’s related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency assessment for each reporting period, which were based on our actual average investment yield before tax as of the September 30 calculation date, were 3.5% for 2022, 4.3% for 2021, and 3.0% for 2020. (j) Goodwill Goodwill results from business acquisitions where the cost of assets and liabilities acquired exceeds the fair value of those assets and liabilities. A quantitative goodwill impairment analysis is performed if our quarterly qualitative analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Goodwill is allocated to the reporting units for purposes of these analyses. Based on our analysis at December 31, 2022, goodwill was not impaired. (k) Reserve for Loss and Loss Expense Reserves for loss and loss expense includes case reserves on reported claims and reserves known as incurred but not reported ("IBNR") reserves. Case reserves are estimated on each individual claim, and based on claim-specific facts and circumstances known at the time. The case reserves may be adjusted upward or downward as the specific facts and circumstances change. IBNR reserves are established at more aggregated levels and include provisions for (i) claims not yet reported, (ii) future development on reported claims, (iii) previously closed claims that could be reopened in the future, and (iv) anticipated salvage and subrogation recoveries. We evaluate our reserves quarterly, through our comprehensive reserve review process and adjustments to recorded reserves are made accordingly. The primary input in evaluating reserve levels is the quarterly reserve review prepared by our internal actuaries, which provides comprehensive loss and loss expense projections. Our reviews are based primarily on our own loss experience, organized by line of business. Where sufficient statistical credibility exists, we may further segment the experience by coverage within line, or by geographic area. Generally accepted actuarial methodologies are applied to these reserve groups to produce ultimate loss and loss expense projections. Typically, we organize our experience by accident year and age, which lends itself to the application of various loss development methods. These methods rely on historical claims reporting and payment patterns to project ultimate loss or expense for open accident years. Consideration is also given to the prior loss estimate, particularly for longer-tailed lines of business, and the current accident year. For the current accident year, this expectation comes from our detailed actuarial planning process. The initial estimate is adjusted over time as actual experience emerges. These methods require numerous assumptions, such as the selection of loss and loss expense development factors and the weight applied to each individual projection method, among others. Therefore, no single method can be interpreted as definitive. Instead, ultimate loss and loss expenses are selected based on the various methods, considering the strengths and weaknesses of each as it applies to the specific line of business and accident year. Certain liabilities, by their nature, do not lend themselves to loss development methods. Examples include property catastrophes (low frequency/high severity, unique events), latent claims (where losses are incurred over an extended period of time), and unallocated loss expenses (loss expenses that cannot be attributed to a specific claim). Alternate estimation techniques are used for these liabilities, some of which are primarily exposure-based methods. These methods include individual claims reviews, calendar year counts and averages, aggregate benchmark measures, such as paid and incurred “survival ratios,” and others. These approaches often require additional assumptions and a greater amount of professional judgment. The result of the reserve review is a set of ultimate loss and loss expense estimates by line of business, including the current and prior accident years. The selected ultimate losses are separated into their components of claim frequency and severity, along with their associated trends, to provide additional insight. While these ultimate loss and loss expense estimates serve as the 87 primary basis for determining the recorded IBNR reserves, other internal and external factors are considered in our overall reserve review. Internal factors include (i) changes to our underwriting and claims practices, (ii) supplemental data on claims reporting and settlement trends, (iii) exposure estimates for reported claims, (iv) potential large or complex claims, and (v) additional trends observed by claims personnel or defense counsel. External factors considered include (i) legislative and regulatory enactments, (ii) judicial trends and decisions, (iii) social trends, including the impacts of social inflation, and (iv) trends in general economic conditions, including the effects of inflation on medical costs, raw materials, and labor. The combination of IBNR estimates and case reserve estimates on individual claims results in our total reserves for loss and loss expense. These reserves are expected to be sufficient for settling loss and loss expense obligations under our policies on unpaid claims, including changes in the (i) volume of business written, (ii) claims frequency and severity, (iii) mix of business, (iv) claims processing, and (v) other items that management expects to affect our ultimate settlement of loss and loss expense. However, our loss and loss expense reserves are estimates of future events, the outcomes of which are not yet known. As with all estimates, they carry inherent uncertainty, which may be driven by internal factors, such as changes to our claims or underwriting operations, or external factors, such as changes in legislative, judicial, economic, or social trends. Actual outcomes are further impacted by inherent randomness, such as the actual number of accidents/incidents, or the occurrence or non-occurrence of a single large event. Because of these uncertainties, it is possible that actual outcomes will differ materially from the reserves established. While this risk cannot be eliminated, we review our reserves quarterly based on the information available at that time, and make adjustments to our ultimate loss and loss expense estimates accordingly. These changes in our ultimate loss and loss expense estimates are reflected in the Consolidated Statements of Income for the period in which such estimates are changed. Changes in the liability estimate could be material to the results of operations in future periods. Loss reserves are estimates, and as such, we also consider a range of possible loss and loss expense reserve estimates. This range is determined at the beginning of each year, using prior year-end data, and reflects the fact that there is no single precise method for estimating the required reserves, due to the many factors that may influence the amounts ultimately paid. We do not discount to present value that portion of our loss and loss expense reserves expected to be paid in future periods. Our loss and loss expense reserves implicitly include anticipated recoveries for salvage and subrogation claims. Claims are counted at the occurrence, line of business, and policy level. For example, if a single occurrence (e.g. an automobile accident) leads to a claim under an automobile and an associated umbrella policy, they are each counted separately. Conversely, multiple claimants under the same occurrence/line/policy would contribute only a single count. The claim counts provided are on a reported basis. A claim is considered reported when a reserve is established or a payment is made. Therefore, claims closed without payment are included in the count as long as there was an associated case reserve at some point in its life cycle. (l) Revenue Recognition Premiums written are recognized as revenue over the period that coverage is provided using the semi-monthly pro-rata method. Unearned premiums and prepaid reinsurance premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force. The Insurance Subsidiaries' net premiums written (“NPW”) include direct insurance policy writings, plus reinsurance assumed, less reinsurance ceded. The estimated premium on the workers compensation and general liability lines is referred to as audit premium. We estimate this premium, as it is anticipated to be either billed or returned on policies subsequent to expiration based on exposure levels (i.e. payroll or sales) when it is reasonably possible to do so based on historical trends adjusted for the uncertainty of future economic conditions. If we determine it is not reasonably possible to estimate this premium, we do not do so. (m) Dividends to Policyholders We establish reserves for dividends to policyholders on certain policies, most significantly workers compensation policies. These dividends are based on the policyholders' loss experience. Dividend reserves are established based on past experience, adjusted for the effects of current developments and anticipated trends. The expense for these dividends is recognized over a period that begins at policy inception and ends with the payment of the dividend. We report these dividends within "Other insurance expenses" on the Consolidated Statement of Income. We do not issue policies that entitle the policyholder to participate in the statutory earnings or surplus of our Insurance Subsidiaries. (n) Federal Income Tax We use the asset and liability method of accounting for income taxes. Current federal income taxes are recognized for the estimated taxes payable or refundable on tax returns for the current year. Deferred federal income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. We consider all evidence, both positive and negative, with respect to our federal net operating and capital loss carryback 88 availability, expected levels of pre-tax financial statement income, and federal taxable income, when evaluating whether the temporary differences will be realized. In projecting future taxable income, we begin with budgeted pre-tax income adjusted for estimated taxable and non-taxable items. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage our businesses. A valuation allowance is established when it is more likely than not that some portion of the deferred tax asset will not be realized. The evaluation of a valuation allowance considers the character of the taxable income, ordinary income versus capital income. A liability for uncertain tax positions is recorded when it is more likely than not that a tax position will not be sustained upon examination by taxing authorities. The effect of a change in tax rates is recognized in the period of enactment. If we were to be levied interest and penalties by the Internal Revenue Service, these amounts would be recognized as a component of “Total federal income tax expense” on the Consolidated Statement of Income. (o) Leases We have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases for computer hardware. We determine if an arrangement is a lease on the commencement date of the contract. Lease assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. The lease asset and liability are measured by the present value of the future minimum lease payments over the lease term. Our fleet vehicle leases include a residual value guarantee; however, the residual value guarantee is not probable of being owed. Therefore, there is no impact to the lease liability or lease asset. To measure the present value, we use the discount rate in the contract. If the discount rate is not readily determinable, our incremental borrowing rate is used. The lease asset is then adjusted to exclude lease incentives. We recognize variable lease payments in the periods in which the obligations for those payments are incurred. In calculating a lease liability, we include options to extend or terminate the lease if it is reasonably certain that we will exercise such option. Lease expense is calculated using the straight-line method. In addition, we have adopted accounting policy elections to: (i) aggregate lease and non-lease components into a single lease component; and (ii) expense short-term leases on a straight-line basis over the lease term. (p) Pension Our pension obligations and related costs are calculated using actuarial methods, within the framework of GAAP. Our pension benefit obligation is determined as the actuarial present value of the vested benefits to which employees are currently entitled, based on the average life expectancy of the employees. Our funding policy provides that payments to our pension trust shall be equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), plus additional amounts that the Board of Directors (the "Board") of Selective Insurance Company of America (“SICA”) may approve from time to time. Two key assumptions, the benefit obligation discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these key assumptions annually unless facts indicate that a more frequent review is required. The discount rate enables us to state expected future cash flows at their present value on the measurement date. The purpose of the discount rate is to determine the interest rates inherent in the price at which pension benefits could be effectively settled. Our discount rate selection is based on high-quality, long-term corporate bonds. To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Other assumptions involve demographic factors such as retirement age and mortality. A portion of our plan assets is allocated to a liability hedging strategy through which we have an expectation that our plan assets will move in tandem with a portion of the plan liabilities, helping to mitigate funding ratio volatility. Note 3. Adoption of Accounting Pronouncements There was no adoption of accounting pronouncements in 2022. Pronouncements to be effective in the future In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition away from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. Companies can elect to adopt ASU 2020-04 as of the beginning of the interim period that includes March 2020, or any date thereafter through December 31, 2024, as permitted by the newly issued ASU 2022-06, Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848. We are currently evaluating the impact of this guidance, but we do not anticipate its adoption to have a material impact on our financial condition and results of operations. 89 In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). ASU 2022-03 clarifies that a contractual sales restriction on an equity security is not considered when determining the security's fair value. This ASU was issued to eliminate diversity in practice by clarifying that contractual arrangements restricting an entity's ability to sell the security for a certain period of time is a characteristic of the reporting entity and should not be contemplated when determining the security's fair value. ASU 2022-03 requires new disclosures that provide investors with information about the restriction, including the nature and remaining duration of the restriction. The ASU is effective for annual periods beginning after December 15, 2023, including interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this guidance. Note 4. Statements of Cash Flows Supplemental cash flow information for the years ended December 31, 2022, 2021, and 2020 was as follows: ($ in thousands) Cash paid during the period for: Interest Federal income tax Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases Operating cash flows from financing leases Financing cash flows from finance leases Non-cash items: Corporate actions related to fixed income securities, AFS1 Corporate actions related to fixed income securities, held-to-maturity ("HTM")1 Corporate actions related to equity securities1 Conversion of AFS fixed income securities to equity securities Assets acquired under finance lease arrangements Assets acquired under operating lease arrangements Non-cash purchase of property and equipment 1Examples of corporate actions include like-kind exchanges, non-cash acquisitions, and stock-splits. 2022 2021 2020 $ 26,639 75,000 28,930 100,000 8,148 46 2,438 38,106 — — 1,463 707 16,649 70 7,935 35 1,768 56,365 — 30,666 15,139 6,709 3,272 472 30,464 47,000 9,498 15 550 55,446 2,589 10,890 — 324 22,390 590 The following table provides a reconciliation of cash and restricted cash reported within the Consolidated Balance Sheets that equate to the amount reported in the Consolidated Statements of Cash Flows: ($ in thousands) Cash Restricted cash Total cash and restricted cash shown in the Statements of Cash Flows December 31, 2022 December 31, 2021 $ $ 26 25,183 25,209 455 44,608 45,063 Amounts in restricted cash represent cash received from the National Flood Insurance Program ("NFIP") that can only be used to pay flood claims under the Write Your Own program. Restricted cash was elevated at December 31, 2021, primarily to pay Hurricane Ida flood claims. 90 Note 5. Investments (a) Net unrealized losses and gains on investments included in "Other comprehensive (loss) income" ("OCI") by asset class were as follows for the years ended December 31, 2022, 2021, and 2020: ($ in thousands) AFS securities: Fixed income securities Total AFS securities HTM securities: Fixed income securities Total HTM securities Short-term securities Total net unrealized (losses) gains Deferred income tax Net unrealized (losses) gains, net of deferred income tax 2022 2021 2020 $ (527,926) (527,926) 228,947 228,947 386,380 386,380 — — 35 (4) (4) 20 7 7 6 (527,891) 110,857 (417,034) 228,963 (48,082) 180,881 386,393 (81,142) 305,251 (Decrease) increase in net unrealized (losses) gains in OCI, net of deferred income tax $ (597,915) (124,370) 134,857 (b) Information regarding our AFS securities as of December 31, 2022 and December 31, 2021 were as follows: December 31, 2022 ($ in thousands) AFS fixed income securities: U.S. government and government agencies Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS RMBS CMBS Total AFS fixed income securities December 31, 2021 ($ in thousands) AFS fixed income securities: U.S. government and government agencies Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS RMBS CMBS Total AFS fixed income securities Cost/ Amortized Cost 209,528 11,199 965,231 2,558,655 1,607,660 1,169,546 663,935 7,185,754 Cost/ Amortized Cost Allowance for Credit Losses Unrealized Gains Unrealized Losses Fair Value — (284) (1,024) (30,330) (2,375) (11,597) (111) (45,721) 37 — 1,812 3,509 2,408 1,148 348 9,262 (20,326) (1,307) (48,001) (196,809) (121,720) (99,265) (49,760) (537,188) 189,239 9,608 918,018 2,335,025 1,485,973 1,059,832 614,412 6,612,107 Allowance for Credit Losses Unrealized Gains Unrealized Losses Fair Value 127,974 15,420 1,121,422 2,478,348 1,343,687 756,280 647,622 6,490,753 $ — (46) (137) (6,682) (939) (1,909) (11) (9,724) 3,629 609 68,258 106,890 14,350 24,813 27,752 246,301 (1,145) (123) (235) (4,953) (6,284) (2,932) (1,682) (17,354) 130,458 15,860 1,189,308 2,573,603 1,350,814 776,252 673,681 6,709,976 $ $ $ $ 91 The following tables provide a roll forward of the allowance for credit losses on our AFS fixed income securities for the years indicated: Total AFS fixed income securities $ 2022 ($ in thousands) Foreign government Obligations of states and political subdivisons Corporate securities CLO and other ABS RMBS CMBS 2021 ($ in thousands) Foreign government Obligations of states and political subdivisons Corporate securities CLO and other ABS RMBS CMBS Beginning Balance $ 46 137 6,682 939 1,909 11 9,724 $ 1 4 2,782 592 561 29 Current Provision for Securities without Prior Allowance 291 1,087 30,670 2,158 245 110 34,561 Initial Allowance for Purchased Credit Deteriorated Assets with Credit Deterioration — — — — 8,318 — 8,318 Increase (Decrease) on Securities with Prior Allowance, excluding intent (or Requirements) to Sell Securities Reductions for Securities Sold Reductions for Securities Identified as Intent (or Requirement) to Sell during the Period 4 (57) (6) 3,714 (652) 1,558 (10) 4,608 (194) (6,902) (50) (433) — (7,636) — — (3,834) (20) — — (3,854) Current Provisions for Securities without Prior Allowance Beginning Balance Increase (Decrease) on Securities with Prior Allowance, excluding intent (or Requirements) to Sell Securities Reductions for Securities Sold Reductions for Securities Identified as Intent (or Requirement) to Sell during the Period 46 122 5,785 579 1,593 10 8,135 (1) 11 (992) (211) (63) (28) (1,284) — — (723) (21) (182) — (926) Ending Balance 284 1,024 30,330 2,375 11,597 111 45,721 Ending Balance 46 137 6,682 939 1,909 11 — — (170) — — — Total AFS fixed income securities $ 3,969 (170) 9,724 During 2022 or 2021, we had no write-offs or recoveries of our AFS fixed income securities. As disclosed in Note 2. "Summary of Significant Accounting Policies," we do not evaluate accrued interest on our AFS securities for expected credit loss as we write-off these balances in a timely manner. Accrued interest on AFS securities was $56.4 million as of December 31, 2022, and $46.3 million as of December 31, 2021. We did not record any material write-offs of accrued interest during 2022 or 2021. (c) Quantitative information about unrealized losses on our AFS portfolio follows: December 31, 2022 Less than 12 months 12 months or longer Total ($ in thousands) AFS fixed income securities: Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. government and government agencies Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS RMBS CMBS Total AFS fixed income securities $ $ 166,975 5,573 681,795 1,889,492 916,423 887,229 512,953 5,060,440 (13,658) (608) (43,767) (164,197) (69,155) (76,432) (37,815) (405,632) 16,011 2,456 16,618 133,223 411,283 108,041 77,181 764,813 (6,668) (699) (4,234) (32,612) (52,565) (22,833) (11,945) (131,556) 182,986 8,029 698,413 2,022,715 1,327,706 995,270 590,134 5,825,253 (20,326) (1,307) (48,001) (196,809) (121,720) (99,265) (49,760) (537,188) 92 December 31, 2021 Less than 12 months 12 months or longer Total ($ in thousands) AFS fixed income securities: Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ U.S. government and government agencies Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS RMBS CMBS Total AFS fixed income securities $ 34,857 2,000 25,837 300,549 663,976 236,010 112,899 1,376,128 (746) (84) (235) (4,903) (4,934) (2,931) (1,016) (14,849) 7,827 1,061 — 2,520 53,368 20 20,326 85,122 (399) (39) — (50) (1,350) (1) (666) (2,505) 42,684 3,061 25,837 303,069 717,344 236,030 133,225 1,461,250 (1,145) (123) (235) (4,953) (6,284) (2,932) (1,682) (17,354) We currently do not intend to sell any of the securities summarized in the tables above, nor will we be required to sell any of them. The increase in gross unrealized losses as December 31, 2022, compared to December 31, 2021, was driven by an increase in benchmark U.S. Treasury rates and a widening of credit spreads, with the increase in interest rates having the most significant impact. The severity of impairment on these securities is less than 10% at both periods. Considering these factors and our review of these securities under our credit loss policy as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K, we have concluded that no allowance for credit loss is required on these balances beyond the allowance for credit loss recorded as of December 31, 2022. This conclusion reflects our current judgment about the financial position and future prospects of the entities that issued the investment security and underlying collateral. (d) AFS and HTM fixed income securities at December 31, 2022, by contractual maturity are shown below. The maturities of mortgage-backed securities were calculated using each security's estimated average life. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. ($ in thousands) Due in one year or less Due after one year through five years Due after five years through 10 years Due after 10 years Total fixed income securities AFS Fair Value $ $ 324,394 2,928,594 2,600,001 759,118 6,612,107 HTM Carrying Value 6,093 3,779 21,285 — 31,157 Fair Value 6,090 3,798 19,949 — 29,837 (e) The following table summarizes our alternative investment portfolio by strategy: ($ in thousands) Alternative investments Private equity Private credit Real assets Total alternative investments December 31, 2022 December 31, 2021 Carrying Value Remaining Commitment Maximum Exposure to Loss Carrying Value Remaining Commitment Maximum Exposure to Loss $ 280,980 54,866 35,470 371,316 134,676 89,481 21,945 246,102 415,656 144,347 57,415 617,418 273,070 63,138 23,524 359,732 99,734 92,674 22,579 214,987 372,804 155,812 46,103 574,719 We are contractually committed to make additional investments up to the remaining commitments stated above. We did not provide any non-contractual financial support during 2022 or 2021. The following is a description of our alternative investment strategies: Our private equity strategy includes the following: • • Primary Private Equity: This strategy makes private equity investments, primarily in established large and middle market companies across diverse industries globally, with an emphasis on North America. Secondary Private Equity: This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination. Investments are made across all sectors of the private equity market, including leveraged buyouts ("LBO"), venture capital, distressed securities, mezzanine financing, real estate, and infrastructure. 93 • Venture Capital: In general, these investments are made principally by investing in equity securities of startup companies and small-to-medium sized privately-held corporations with strong long-term growth potential. This strategy makes private equity investments in seed stage, early stage, late stage, and growth equity partnerships. Our private credit strategy includes the following: • Direct Lending: This strategy provides privately negotiated loans to U.S. middle market companies. Typically, these are floating rate, senior secured loans diversified across industries. Loans are made to companies that may or may not have private equity sponsors to finance LBOs, recapitalizations, and acquisitions. • Mezzanine Financing: This strategy provides privately-negotiated fixed income securities, generally with an equity component, to LBO firms and private and publicly-traded large, mid, and small-cap companies to finance LBOs, recapitalizations, and acquisitions. • Opportunistic and Distressed Debt: This strategy makes investments in debt and equity securities of companies that are experiencing financial distress, operational issues, or dislocated pricing of publicly-traded securities. Investments include buying indebtedness of bankrupt or financially-troubled companies, small balance loan portfolios, special situations and capital structure arbitrage trades, commercial real estate mortgages, and similar non-U.S. securities and debt obligations. Our real assets strategy includes the following: • • Infrastructure: This strategy invests in the equity or debt of cash flow generating assets, diversified across a variety of industries, including transportation, energy infrastructure, renewable power, such as wind and solar, social infrastructure, power generation, water, telecom, and other regulated entities principally located in North America and Western Europe. Real Estate: This strategy invests in real estate in North America, Europe, and Asia via direct property ownership, joint ventures, mortgages, and investments in equity and debt instruments. Our alternative investment strategies may employ leverage and may use hedging to reduce foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We typically cannot redeem our investments with the general partners of these investments; however, occasionally these partnership positions can be sold on the secondary market. Once liquidation is triggered by clauses within the limited partnership agreements or at the funds’ stated end date, we receive our final allocation of capital and any earned appreciation of the underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently receive distributions from these alternative investments through the realization of the underlying investments of, or income generated by, the limited partnerships. The following tables show gross summarized financial information for our alternative investments portfolio, including the portion we do not own. As the majority of these investments report results to us on a one quarter lag, the summarized financial statement information is as of, and for the 12-month period ended, September 30: Balance Sheet Information December 31, ($ in millions) Investments Total assets Total liabilities Total partners’ capital 2022 2021 $ 114,038 128,158 15,464 112,694 107,347 112,232 12,371 99,861 94 Income Statement Information 12 months ended September 30, ($ in millions) Net investment income (loss) Realized gains Net change in unrealized appreciation Net income Alternative investment income included in "Net investment income earned" on our Consolidated Statements of Income 2022 2021 2020 $ $ 765 12,590 (5,215) 8,140 23.0 653 6,121 26,877 33,651 117.7 (26) 1,452 4,898 6,324 26.5 (f) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity, other than to certain U.S. government agencies, as of December 31, 2022 or December 31, 2021. (g) We have pledged certain AFS fixed income securities as collateral related to our borrowing relationships with the Federal Home Loan Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, we had certain securities on deposit with various state and regulatory agencies at December 31, 2022 to comply with insurance laws. We retain all rights regarding all securities pledged as collateral. The following table summarizes the market value of these securities at December 31, 2022: ($ in millions) U.S. government and government agencies Obligations of states and political subdivisions RMBS CMBS Total pledged as collateral FHLBI Collateral FHLBNY Collateral Regulatory Deposits Total $ $ — — 61.4 4.6 66.0 — — 28.8 9.6 38.4 19.3 3.6 — — 22.9 19.3 3.6 90.2 14.2 127.3 (h) The components of pre-tax net investment income earned were as follows: ($ in thousands) Fixed income securities CMLs Equity securities Short-term investments Alternative investments Other investments Investment expenses 2022 2021 2020 $ 259,918 5,555 13,554 3,997 23,003 258 (18,130) 288,155 209,709 2,743 15,920 260 117,701 359 (20,103) 326,589 203,926 844 9,286 1,821 26,504 418 (15,692) 227,107 Net investment income earned $ (i) The following table summarizes net realized and unrealized investment gains and losses for the periods indicated: ($ in thousands) Gross gains on sales Gross losses on sales Net realized (losses) gains on disposals Net unrealized (losses) gains on equity securities Net credit loss (expense) on fixed income securities, AFS Net credit loss (expense) benefit on fixed income securities, HTM Net credit loss (expense) on CMLs Losses on securities for which we have the intent to sell Net realized and unrealized investment (losses) gains 2022 2021 2020 $ $ 28,419 (60,055) (31,636) (32,127) (39,169) 63 (116) (11,823) (114,808) 15,284 (8,140) 7,144 17,881 (6,858) (49) — (519) 17,599 18,893 (9,745) 9,148 7,939 (5,042) 4 — (16,266) (4,217) Net realized and unrealized investment losses in 2022 were primarily driven by (i) a decrease in valuations reflecting the current public equities market, (ii) active trading of our fixed income securities in an effort to opportunistically increase yield given the rising interest rate environment, and (iii) higher credit loss expense on our AFS fixed income securities portfolio. 95 Net unrealized losses and gains recognized in income on equity securities, as reflected in the table above, included the following: ($ in thousands) 2022 2021 2020 Unrealized (losses) gains recognized in income on equity securities: On securities remaining in our portfolio at end of period On securities sold in period Total unrealized (losses) gains recognized in income on equity securities $ $ (10,454) (21,673) (32,127) 16,473 1,408 17,881 7,936 3 7,939 Proceeds from the sales of AFS fixed income securities were $1,211.7 million, $502.9 million, and $487.1 million in 2022, 2021, and 2020, respectively. Proceeds from the sales of equity securities were $186.1 million, $99.2 million, and $1.3 million in 2022, 2021, and 2020, respectively. Note 6. Comprehensive Income (a) The components of comprehensive income, both gross and net of tax, for 2022, 2021, and 2020 are as follows: 2022 ($ in thousands) Net income Components of OCI: Unrealized (losses) gains on investment securities: Unrealized holding losses during the year Unrealized losses on securities with credit loss recognized in earnings Amounts reclassified into net income: HTM securities Net realized losses on disposals and intent-to-sell AFS securities Credit loss expense Total unrealized losses on investment securities Defined benefit pension and post-retirement plans: Net actuarial loss Amounts reclassified into net income: Net actuarial loss Total defined benefit pension and post-retirement plans Other comprehensive loss Comprehensive loss 2021 ($ in thousands) Net income Components of OCI: Unrealized (losses) gains on investment securities: Unrealized holding losses during the year Unrealized losses on securities with credit loss recognized in earnings Amounts reclassified into net income: HTM securities Net realized gains on disposals and losses on intent-to-sell AFS securities Credit loss expense Total unrealized losses on investment securities Defined benefit pension and post-retirement plans: Net actuarial gain Amounts reclassified into net income: Net actuarial loss Total defined benefit pension and post-retirement plans Other comprehensive loss Comprehensive income 96 Gross Tax Net $ 280,186 55,300 224,886 (668,107) (187,968) 4 60,048 39,169 (756,854) (140,302) (39,473) 1 12,610 8,225 (158,939) (527,805) (148,495) 3 47,438 30,944 (597,915) (20,941) (4,398) (16,543) 1,668 (19,273) (776,127) (495,941) $ 351 (4,047) (162,986) (107,686) 1,317 (15,226) (613,141) (388,255) Gross Tax Net $ 505,310 101,473 403,837 (151,391) (9,061) (11) (3,825) 6,858 (157,430) (31,793) (1,902) (2) (803) 1,440 (33,060) (119,598) (7,159) (9) (3,022) 5,418 (124,370) 21,636 4,543 17,093 2,772 24,408 (133,022) 372,288 $ 582 5,125 (27,935) 73,538 2,190 19,283 (105,087) 298,750 2020 ($ in thousands) Net income Components of OCI: Unrealized gains (losses) on investment securities: Unrealized holding gains during the year Unrealized losses on securities with credit loss recognized in earnings Amounts reclassified into net income: HTM securities Net realized losses on disposals and intent-to-sell AFS securities Credit loss expense Total unrealized gains on investment securities Defined benefit pension and post-retirement plans: Net actuarial gain Amounts reclassified into net income: Net actuarial loss Total defined benefit pension and post-retirement plans Other comprehensive income Comprehensive income Gross Tax Net $ 302,988 56,633 246,355 168,487 (8,176) (24) 5,376 5,042 170,705 35,383 (1,717) (5) 1,129 1,058 35,848 133,104 (6,459) (19) 4,247 3,984 134,857 1,515 318 1,197 3,015 4,530 175,235 478,223 $ 633 951 36,799 93,432 2,382 3,579 138,436 384,791 (b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2022 and 2021 were as follows: Net Unrealized (Losses) Gains on Investment Securities Credit Loss Related1 All Other $ HTM Related ($ in thousands) Balance, December 31, 2020 OCI before reclassifications Amounts reclassified from AOCI Net current period OCI Balance, December 31, 2021 OCI before reclassifications Amounts reclassified from AOCI Net current period OCI Balance, December 31, 2022 $ 1Represents change in unrealized loss on securities with credit loss recognized in earnings. (2,546) (7,159) 5,418 (1,741) (4,287) (148,495) 30,944 (117,551) (121,838) 6 — (9) (9) (3) — 3 3 — 307,790 (119,598) (3,022) (122,620) 185,170 (527,805) 47,438 (480,367) (295,197) Investments Subtotal 305,250 (126,757) 2,387 (124,370) 180,880 (676,300) 78,385 (597,915) (417,035) Defined Benefit Pension and Post-retirement Plans Total AOCI (85,064) 17,093 2,190 19,283 (65,781) (16,543) 1,317 (15,226) (81,007) 220,186 (109,664) 4,577 (105,087) 115,099 (692,843) 79,702 (613,141) (498,042) 97 The reclassifications out of AOCI are as follows: ($ in thousands) HTM related Year ended December 31, 2022 Year ended December 31, 2021 Affected Line Item in the Consolidated Statements of Income Unrealized gains on HTM disposals Amortization of net unrealized losses on HTM securities $ Net realized losses (gains) on disposals and losses on intent-to-sell AFS securities Net realized losses (gains) on disposals and losses on intent-to-sell AFS securities Credit loss related Credit loss expense Defined benefit pension and post-retirement life plans Net actuarial loss Total defined benefit pension and post-retirement life (7) 11 4 (1) 3 60,048 60,048 (12,610) 47,438 39,169 39,169 (8,225) 30,944 359 1,309 1,668 (351) 1,317 (14) Net realized and unrealized investment (losses) gains 3 Net investment income earned (11) Income before federal income tax 2 Total federal income tax expense (9) Net income (3,825) Net realized and unrealized investment (losses) gains (3,825) Income before federal income tax 803 Total federal income tax expense (3,022) Net income 6,858 Net realized and unrealized investment (losses) gains 6,858 Income before federal income tax (1,440) Total federal income tax expense 5,418 Net income 638 Loss and loss expense incurred 2,134 Other insurance expenses 2,772 Income before federal income tax (582) Total federal income tax expense 2,190 Net income Total reclassifications for the period $ 79,702 4,577 Net income Note 7. Fair Value Measurements The financial assets in our investment portfolio are primarily measured at fair value as disclosed on the Consolidated Balance Sheets. The following table presents the carrying amounts and estimated fair values of our financial liabilities as of December 31, 2022 and 2021: ($ in thousands) Financial Liabilities Long-term debt: 7.25% Senior Notes 6.70% Senior Notes 5.375% Senior Notes 3.03% Borrowings from FHLBI Subtotal long-term debt Unamortized debt issuance costs Finance lease obligations Total long-term debt December 31, 2022 December 31, 2021 Carrying Amount Fair Value Carrying Amount Fair Value $ $ 49,921 99,542 294,424 60,000 503,887 (2,929) 3,718 504,676 51,705 99,264 258,459 57,175 466,603 $ 49,917 99,520 294,330 60,000 503,767 (3,167) 5,450 506,050 63,719 127,574 395,652 64,126 651,071 For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant Accounting Policies" of this Form 10-K. 98 The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at December 31, 2022 and 2021: December 31, 2022 ($ in thousands) Description Measured on a recurring basis: AFS fixed income securities: Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Measured at Fair Value U.S. government and government agencies $ Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS RMBS CMBS Total AFS fixed income securities Equity securities: Common stock1 Preferred stock Total equity securities Short-term investments 189,239 9,608 918,018 2,335,025 1,485,973 1,059,832 614,412 6,612,107 160,355 1,645 162,000 440,456 Total assets measured at fair value $ 7,214,563 109,240 — — — — — — 109,240 55,846 1,645 57,491 418,199 584,930 79,999 9,608 911,357 2,147,045 1,332,631 1,059,832 614,037 6,154,509 — — — 22,257 6,176,766 — — 6,661 187,980 153,342 — 375 348,358 897 — 897 — 349,255 December 31, 2021 ($ in thousands) Description Measured on a recurring basis: AFS fixed income securities: Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Measured at Fair Value U.S. government and government agencies $ Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS RMBS CMBS Total AFS fixed income securities Equity securities: Common stock1 Preferred stock Total equity securities Short-term investments 130,458 15,860 1,189,308 2,573,603 1,350,814 776,252 673,681 6,709,976 333,449 2,088 335,537 447,863 60,615 — — — — — — 60,615 249,846 2,088 251,934 442,723 69,843 15,860 1,181,563 2,459,476 1,225,905 776,007 669,425 6,398,079 — — — 5,140 — — 7,745 114,127 124,909 245 4,256 251,282 — — — — Total assets measured at fair value 251,282 1Investments amounting to $103.6 million and $83.6 million at December 31, 2022 and December 31, 2021, respectively, were measured at fair value using the net asset value per share (or its practical expedient) and have not been classified in the fair value hierarchy. These investments are not redeemable and the timing of liquidations of the underlying assets is unknown at each reporting period. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total assets measured at fair value. 7,493,376 6,403,219 755,272 $ 99 The following tables provide a summary of Level 3 changes for the years indicated: 2022 ($ in thousands) Fair value, December 31, 2021 Total net (losses) gains for the period included in: OCI Net realized and unrealized investment (losses) gains Net investment income earned Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Fair value, December 31, 2022 Obligations of states and political subdivisions $ $ 7,745 (985) (99) — — — — — — — 6,661 Corporate Securities 114,127 CLO and Other ABS 124,909 RMBS CMBS 245 4,256 (23,624) (2,414) 68 99,868 — — (10,148) 19,214 (9,111) 187,980 (11,287) (876) 229 100,406 — — (12,361) 502 (48,180) 153,342 (17) — — — — — (11) — (217) — (481) — 45 — — — (15) — (3,430) 375 Common Stock — — — — — — — — 897 — 897 Total 251,282 (36,394) (3,389) 342 200,274 — — (22,535) 20,613 (60,938) 349,255 Change in unrealized losses for the period included in earnings for assets held at period end Change in unrealized losses for the period included in OCI for assets held at period end (99) (2,399) (876) — — — (3,374) (985) (23,630) (11,246) (17) (481) — (36,359) 2021 ($ in thousands) Fair value, December 31, 2020 Total net (losses) gains for the period included in: OCI Net realized and unrealized investment (losses) gains Net investment income earned Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Fair value, December 31, 2021 Change in unrealized (losses) gains for the period included in earnings for assets held at period end Change in unrealized (losses) gains for the period included in OCI for assets held at period end Obligations of states and political subdivisions Corporate Securities CLO and Other ABS RMBS CMBS $ 2,894 70,700 56,375 (239) (11) — — — — — 5,101 — 7,745 1,636 (50) 27 64,813 — — (544) 981 (23,436) 114,127 (520) (214) 16 76,731 — — (5,161) 11,344 (13,662) 124,909 (11) (50) (239) 1,636 (214) (520) $ — — — — 249 — — (4) — — 245 — — — (196) 5 19 98 — — (52) 4,382 — 4,256 Total 129,969 681 (270) 62 141,891 — — (5,761) 21,808 (37,098) 251,282 5 (270) (196) 681 The following tables present quantitative information about the significant unobservable inputs used in the fair value measurements of Level 3 assets at December 31, 2022 and 2021: December 31, 2022 ($ in thousands) Internal valuations: Corporate securities CLO and other ABS Total internal valuations Other1 Total Level 3 securities Assets Measured at Fair Value Valuation Techniques Unobservable Inputs Range Weighted Average $ $ 81,867 Discounted Cash Flow Illiquidity Spread 59,452 Discounted Cash Flow Illiquidity Spread (4.4)% - 5.3% 0.01% - 19.6% 1.3% 2.5% 141,319 207,936 349,255 100 December 31, 2021 ($ in thousands) Internal valuations: Corporate securities CLO and other ABS Total internal valuations Other1 Total Level 3 securities Assets Measured at Fair Value Valuation Techniques Unobservable Inputs Range Discounted Cash Flow Discounted Cash Flow Illiquidity Spread Illiquidity Spread 0.3% - 3.0% 0.7% - 8.0% $ $ 54,135 34,903 89,038 162,244 251,282 Weighted Average (1.2)% (2.1)% 1Other is comprised of broker quotes or other third-party pricing for which there is a lack of transparency into the inputs used to develop the valuations. The quantitative details of these unobservable inputs is neither provided to us, nor reasonably available to us, and therefore are not included in the tables above. For the securities in the tables above valued using a discounted cash flow analysis, we apply an illiquidity spread in our determination of fair value. An increase in this assumption would result in a lower fair value measurement. The following tables provide quantitative information regarding our financial assets and liabilities that were not measured at fair value, but were disclosed as such at December 31, 2022 and 2021: December 31, 2022 Fair Value Measurements Using ($ in thousands) Financial Assets HTM: Obligations of states and political subdivisions Corporate securities Total HTM fixed income securities CMLs Financial Liabilities Long-term debt: 7.25% Senior Notes 6.70% Senior Notes 5.375% Senior Notes 3.03% Borrowings from FHLBI Total long-term debt Assets/Liabilities Disclosed at Fair Value Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ $ $ $ 3,405 26,432 29,837 139,243 51,705 99,264 258,459 57,175 466,603 — — — — — — — — — 3,405 26,432 29,837 — — — — 139,243 51,705 99,264 258,459 57,175 466,603 — — — — — December 31, 2021 Fair Value Measurements Using ($ in thousands) Financial Assets HTM: Obligations of states and political subdivisions Corporate securities Total HTM fixed income securities CMLs Financial Liabilities Long-term debt: 7.25% Senior Notes 6.70% Senior Notes 5.375% Senior Notes 3.03% Borrowings from FHLBI Total long-term debt Assets/Liabilities Disclosed at Fair Value Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) — — — — — — — — — 3,576 25,884 29,460 — — — — 97,598 63,719 127,574 395,652 64,126 651,071 — — — — — $ $ $ $ $ 3,576 25,884 29,460 97,598 63,719 127,574 395,652 64,126 651,071 101 Note 8. Allowance for Credit Losses on Premiums Receivable The following table provides a roll forward of the ACL on our premiums receivable balance for 2022 and 2021: ($ in thousands) Balance at beginning of year Current period change for expected credit losses Write-offs charged against the allowance for credit losses Recoveries ACL, end of year December 31, 2022 December 31, 2021 $ $ 13,600 6,065 (4,978) 1,413 16,100 21,000 1,291 (9,343) 652 13,600 In 2022, we recognized an additional allowance for credit losses on premiums receivable of $7.5 million, excluding the impact of write-offs. The additional allowance consisted of a reserve of $9.3 million on 2022 premiums based on our historical write- off percentages and assumptions, partially offset by a $1.8 million allowance reduction on 2021 and older policies, primarily impacted by the COVID-19 pandemic, for which the credit loss did not fully materialize. In 2021, we recognized an additional allowance for credit losses on premiums receivable of $1.9 million, excluding the impact of write-offs. The additional allowance consisted of a reserve of $8.3 million on 2021 premiums based on our historical write- off percentages and assumptions, partially offset by a $6.4 million allowance reduction on older policies, primarily impacted by the COVID-19 pandemic, for which the credit loss did not fully materialize, as mentioned above. For a discussion of the methodology used to evaluate our estimate of expected credit losses on premiums receivable, refer to Note 2. "Summary of Significant Accounting Policies." Note 9. Reinsurance Our Financial Statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance entities have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) that we have underwritten to other insurance companies that agree to share these risks. The primary purpose of ceded reinsurance is to protect the Insurance Subsidiaries from potential losses in excess of the amount that we are prepared to accept. Our major treaties covering property, property catastrophe, and casualty business are excess of loss contracts. In addition, we have an intercompany quota share (proportional) pooling arrangement and other minor reinsurance treaties. As a Standard Commercial Lines and E&S Lines writer, we are subject to the Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"), which was extended by Congress to December 31, 2027. TRIPRA requires private insurers and the U. S. government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2023, our deductible, before tax, is approximately $480 million. For losses above the deductible, the federal government will pay 80% of losses to an industry limit of $100 billion, and the insurer retains 20%. The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their contractual obligations. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses and improving their financial strength ratings. The credit quality of our reinsurers is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. 102 The following tables provide (i) a disaggregation of our reinsurance recoverable balance by financial strength rating, and (ii) an aging analysis of our past due reinsurance recoverable balances as of December 31, 2022 and 2021: ($ in thousands) Financial strength rating of rated reinsurers A++ A+ A A- Total rated reinsurers Non-rated reinsurers Federal and state pools Other than federal and state pools Total non-rated reinsurers Total reinsurance recoverable, gross Less: ACL Total reinsurance recoverable, net ($ in thousands) Financial strength rating of rated reinsurers A++ A+ A A- Total rated reinsurers Non-rated reinsurers Federal and state pools Other than federal and state pools Total non-rated reinsurers Total reinsurance recoverable, gross Less: ACL Total reinsurance recoverable, net December 31, 2022 Current Past Due Total Reinsurance Recoverables 46,282 $ 425,395 106,102 7,148 584,927 $ 180,794 $ 13,678 194,472 $ 1 $ 3,191 1,315 89 4,596 $ — $ 415 415 $ 779,399 $ 5,011 $ $ 46,283 428,586 107,417 7,237 589,523 180,794 14,093 194,887 784,410 (1,600) 782,810 Current December 31, 2021 Past Due Total Reinsurance Recoverables 38,601 $ 339,857 95,675 3,209 477,342 $ 116,378 $ 4,597 120,975 $ 9 $ 1,520 1,227 145 2,901 $ — $ 450 450 $ 598,317 $ 3,351 $ $ 38,610 341,377 96,902 3,354 480,243 116,378 5,047 121,425 601,668 (1,600) 600,068 $ $ $ $ $ $ $ $ $ $ The $109.3 million increase in "Total rated reinsurers" as of December 31, 2022, compared to December 31, 2021, was primarily due to reserves recorded for Winter Storm Elliott, which impacted 37 states, 26 of which are in our Standard Commercial Lines footprint. Additionally, the $64.4 million increase in "Federal and state pools" as of December 31, 2022, compared to December 31, 2021, was primarily due to NFIP reserves recorded for flood losses in Florida and surrounding states as a result of Hurricane Ian, which are 100% ceded to the NFIP. The following table provides a roll forward of the allowance for credit losses on our reinsurance recoverable balance for 2022 and 2021: ($ in thousands) Balance at beginning of year Current period change for expected credit losses Write-offs charged against the allowance for credit losses Recoveries ACL, end of year December 31, 2022 December 31, 2021 $ $ 1,600 $ — — — 1,600 $ 1,777 (177) — — 1,600 For a discussion of the methodology used to evaluate our estimate of expected credit losses on our reinsurance recoverable balance, refer to Note 2. "Summary of Significant Accounting Policies." 103 The following table represents our total reinsurance balances segregated by reinsurer to illustrate our concentration of risk throughout our reinsurance portfolio: ($ in thousands) Total reinsurance recoverables, net of allowance for credit losses Total prepaid reinsurance premiums Total reinsurance balance Federal and state pools1: NFIP New Jersey Unsatisfied Claim Judgment Fund Other Total federal and state pools Remaining reinsurance balance Munich Re Group (AM Best rated "A+") Hannover Ruckversicherungs AG (AM Best rated "A+") AXIS Reinsurance Company (AM Best rated "A") Swiss Re Group (AM Best rated "A+") Transatlantic Reinsurance Company (AM Best rated “A+”) All other reinsurers Total reinsurers Less: ACL Reinsurers, net of ACL Less: collateral2 Reinsurers, net of collateral As of December 31, 2022 % of Reinsurance Balance Reinsurance Balances As of December 31, 2021 % of Reinsurance Balance Reinsurance Balances $ $ $ $ 782,810 172,371 955,181 276,541 45,496 3,488 325,525 629,656 127,106 124,706 70,957 36,525 32,730 239,232 631,256 (1,600) 629,656 (126,167) 503,489 $ $ $ $ 29 % 5 — 34 66 13 13 8 4 3 25 66 % 600,068 183,007 783,075 223,845 49,738 2,385 275,968 507,107 108,381 107,110 70,814 29,186 26,490 166,726 508,707 (1,600) 507,107 (128,699) 378,408 29 % 6 — 35 65 14 14 9 4 3 21 65 % 1Considered to have minimal risk of default. 2Includes letters of credit, trust funds, and funds held against reinsurance recoverables. Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries are recognized as gross losses are incurred. The following table lists direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and loss expense incurred for the indicated periods: ($ in thousands) Premiums written: Direct Assumed Ceded Net Premiums earned: Direct Assumed Ceded Net Loss and loss expense incurred: Direct Assumed Ceded Net 2022 2021 2020 4,068,518 32,320 (527,248) 3,573,590 3,880,522 30,742 (537,884) 3,373,380 2,537,638 23,160 (449,020) 2,111,778 3,656,537 22,664 (489,488) 3,189,713 3,472,715 21,550 (477,012) 3,017,253 2,096,512 13,813 (296,341) 1,813,984 3,204,512 24,288 (455,708) 2,773,092 3,108,687 25,010 (451,883) 2,681,814 1,822,034 17,201 (203,412) 1,635,823 $ $ $ $ $ $ 104 Ceded premiums written, ceded premiums earned, and ceded loss and loss expense incurred related to our participation in the NFIP, to which we cede 100% of our NFIP flood premiums, losses, and loss expenses, were as follows: Ceded to NFIP ($ in thousands) Ceded premiums written Ceded premiums earned Ceded loss and loss expense incurred 2022 2021 2020 $ (259,246) (274,100) (200,467) (284,311) (274,384) (215,224) (274,042) (271,598) (78,993) Note 10. Reserve for Loss and Loss Expense (a) The table below provides a roll forward of reserves for loss and loss expense for beginning and ending reserve balances: ($ in thousands) Gross reserves for loss and loss expense, at beginning of year Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year1 Net reserves for loss and loss expense, at beginning of year Incurred loss and loss expense for claims occurring in the: Current year Prior years Total incurred loss and loss expense Paid loss and loss expense for claims occurring in the: Current year Prior years $ 2022 4,580,903 578,641 4,002,262 2,190,668 (78,890) 2,111,778 768,583 958,149 1,726,732 4,387,308 757,513 5,144,821 2021 4,260,355 554,269 3,706,086 1,896,837 (82,853) 1,813,984 676,331 841,477 1,517,808 4,002,262 578,641 4,580,903 2020 4,067,163 547,066 3,520,097 1,708,755 (72,932) 1,635,823 642,586 807,248 1,449,834 3,706,086 554,269 4,260,355 Total paid loss and loss expense Net reserves for loss and loss expense, at end of year Add: Reinsurance recoverable on unpaid loss and loss expense, at end of year Gross reserves for loss and loss expense at end of year 12020 includes an adjustment of $2.9 million related to our adoption of ASU 2016-13, Financial Instruments - Credit Losses. $ Our net loss and loss expense reserves increased by $385.0 million in 2022, $296.2 million in 2021, and $183.1 million in 2020. The loss and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $91.3 million for 2022, $87.0 million for 2021, and $80.9 million for 2020. The increase in net loss and loss expense reserves in 2022 was primarily driven by increases in exposure due to premium growth. This increase in our net loss and loss expense reserves was partially offset by favorable prior year loss reserve development. In 2022, we experienced overall net favorable prior year loss reserve development of $78.9 million, compared to $82.9 million in 2021 and $72.9 million in 2020. The following table summarizes the prior year reserve development by line of business: (Favorable)/Unfavorable Prior Year Development ($ in millions) General Liability Commercial Automobile Workers Compensation Businessowners' Policies Commercial Property Bonds Homeowners Personal Automobile E&S Casualty Lines E&S Property Lines Other Total 2022 2021 2020 $ $ (5.0) 22.5 (70.0) (7.3) (1.6) (10.0) (0.6) 0.5 (5.0) (2.5) 0.1 (78.9) (29.0) 13.3 (58.0) (0.4) (2.6) — 1.8 (0.2) (7.0) (0.8) — (82.9) (35.0) 7.1 (60.0) 3.9 9.2 — 7.7 (1.8) — (4.0) — (72.9) The Insurance Subsidiaries had $78.9 million of favorable prior year reserve development during 2022, which included $86.0 million of net favorable casualty reserve development and $7.1 million of unfavorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation line of business, which was impacted by continued favorable medical trends in accident years 2020 and prior, and favorable inception-to-date claim frequencies in accident year 2020. Partially offsetting this net favorable reserve development was $15.0 million of unfavorable casualty 105 reserve development in the commercial auto line of business ($22.5 million net of property reserve development), primarily driven by increased loss severities in accident year 2021. The Insurance Subsidiaries had $82.9 million of favorable prior year reserve development during 2021, which included $81.0 million of net favorable casualty reserve development and $1.9 million of favorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business. Workers compensation was impacted by continued favorable medical trends in accident years 2019 and prior, and general liability development was attributable to lower loss severities in accident years 2018 and prior. In addition, our E&S casualty lines experienced favorable reserve development of $7.0 million in 2021. Partially offsetting this net favorable reserve development was $15.0 million of unfavorable casualty reserve development in the commercial auto line of business ($13.3 million net of property reserve development), driven by unfavorable reserve development on loss severities in accident years 2016 through 2019. The Insurance Subsidiaries had $72.9 million of favorable prior year reserve development during 2020, which included $85.0 million of net favorable casualty reserve development and $12.1 million of unfavorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business. Workers compensation was impacted by continued favorable medical trends in accident years 2018 and prior, and general liability development was attributable to lower loss severities in accident years 2017 and prior. Partially offsetting this net favorable reserve development was $10.0 million of unfavorable casualty reserve development in the commercial auto line of business ($7.1 million net of property reserve development), driven by unfavorable reserve development on loss severities in accident years 2016 through 2019, and higher than expected frequencies in accident year 2019. (b) We have exposure to abuse or molestation claims within our general liability line of business, primarily through insurance policies that we issue to schools, religious institutions, day-care facilities, and other social services. We also have exposure to abuse or molestation claims from recently enacted state laws that extend the statute of limitations or permit windows to be opened for abuse or molestation claims and lawsuits that were previously barred by statutes of limitations. The emergence of these claims is highly unpredictable and may be reported over an extended period of time. In addition to legislative changes that increase our exposure, there are significant uncertainties in estimating our exposure to abuse or molestation claims (for both case and IBNR reserves) resulting from (i) lack of relevant historical data, (ii) the delayed and inconsistent reporting patterns associated with these claims, (iii) the obligation of an insurer to defend a claim, (iv) the extent to which a party can prove the existence of coverage, and (v) uncertainty as to the number and identity of claimants. It is possible, as a result, that we may receive claims decades after the allegations occurred from coverages provided by us or our predecessor companies, that will require complex claims coverage determinations, potential litigation, and the need to collect from reinsurers under older reinsurance agreements. (c) Reserves established for liability insurance include exposure to asbestos and environmental claims. These claims have arisen primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners policies. The emergence of these claims is highly unpredictable and may be reported over an extended period of time. There are significant uncertainties in estimating our exposure to asbestos and environmental claims (for both case and IBNR reserves) resulting from (i) lack of relevant historical data, (ii) the delayed and inconsistent reporting patterns associated with these claims, and (iii) uncertainty as to the number and identity of claimants and complex legal and coverage issues. Legal issues that arise in asbestos and environmental cases include federal or state venue, choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint defendants, successor and predecessor liability, and whether direct action against insurers can be maintained. Coverage issues that arise in asbestos and environmental cases include the interpretation and application of policy exclusions, the determination and calculation of policy limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a policy, if at all, the obligation of an insurer to defend a claim, and the extent to which a party can prove the existence of coverage. Courts have reached different and sometimes inconsistent conclusions on these legal and coverage issues. Traditional accident year loss development methods cannot be applied because past loss history is not necessarily indicative of future behavior. Instead, we review the experience by calendar year and rely on alternative metrics, such as paid and incurred survival ratios. As a result, reserves for asbestos and environmental require a high degree of judgment. 106 The following table details our loss and loss expense reserves for various asbestos and environmental claims showing gross and net of reinsurance: ($ in millions) Asbestos Landfill sites Underground storage tanks Total 2022 Gross Net $ $ 5.9 11.8 10.1 27.8 4.7 7.5 8.1 20.3 Historically, our asbestos and environmental claims have been significantly lower in volume than many other Standard Commercial Lines carriers since, prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980’s, we primarily wrote Standard Personal Lines, and therefore, our exposure to asbestos and environmental claims has been limited. The following table provides a roll forward of asbestos and environmental incurred loss and loss expense and related reserves thereon showing gross and net of reinsurance: ($ in thousands) Asbestos Reserves for loss and loss expense at beginning of year Incurred loss and loss expense Less: loss and loss expense paid Reserves for loss and loss expense at the end of year Environmental Reserves for loss and loss expense at beginning of year Incurred loss and loss expense Less: loss and loss expense paid Reserves for loss and loss expense at the end of year Total Asbestos and Environmental Claims Reserves for loss and loss expense at beginning of year Incurred loss and loss expense Less: loss and loss expense paid Reserves for loss and loss expense at the end of year 2022 2021 2020 Gross Net Gross Net Gross Net $ $ $ $ $ $ 6,115 8 (232) 5,891 21,658 696 (477) 21,877 27,773 704 (709) 27,768 4,884 8 (232) 4,660 16,191 (213) (309) 15,669 21,075 (205) (541) 20,329 6,254 51 (190) 6,115 22,276 (613) (5) 21,658 28,530 (562) (195) 27,773 5,023 51 (190) 4,884 16,398 (14) (193) 16,191 21,421 37 (383) 21,075 6,288 320 (354) 6,254 22,413 (447) 310 22,276 28,701 (127) (44) 28,530 5,057 320 (354) 5,023 16,532 (474) 340 16,398 21,589 (154) (14) 21,421 107 (d) The following is information about incurred and paid claims development as of December 31, 2022, net of reinsurance, as well as the associated IBNR liabilities. During the experience period we implemented a series of underwriting and claims- related initiatives, including claims management changes. These initiatives focused on general underwriting and claims improvements occurring naturally through our portfolio and may impact some relationships in the tables below. As a result, several historical patterns have changed and may no longer be appropriate to use as the sole basis for projections. The tables below also include information regarding reported claims. Claims are counted at the occurrence, line of business, and policy level. For example, if a single occurrence (e.g. an automobile accident) leads to a claim under an automobile and an associated umbrella policy, they are each counted separately. Conversely, multiple claimants under the same occurrence/line/ policy would contribute only a single count. A claim is considered reported when a reserve is established or a payment is made. Therefore, claims closed without payment are included in the count as long as there was an associated case reserve at some point in its life cycle. The cumulative number of reported claims for each accident year in the tables below are updated with information available as of December 31, 2022. Therefore, the claim counts presented for the more recent accident years may not be representative of the ultimate claim counts, as they are for the more mature accident years presented. All Lines (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 1,044,142 1,062,045 1,047,230 1,021,007 1,002,316 987,763 984,858 973,739 957,958 951,813 1,107,513 1,133,798 1,146,990 1,124,014 1,104,218 1,100,208 1,089,529 1,094,367 1,090,345 1,114,081 1,130,513 1,144,830 1,138,313 1,119,441 1,108,860 1,103,592 1,103,543 1,188,608 1,203,634 1,227,142 1,199,734 1,180,829 1,171,273 1,167,539 1,270,110 1,313,372 1,313,585 1,288,526 1,268,941 1,273,039 33,631 42,087 45,698 67,934 84,415 1,413,800 1,461,603 1,457,415 1,441,303 1,425,540 153,214 1,483,945 1,523,041 1,526,566 1,529,859 272,639 1,591,972 1,587,607 1,550,195 395,519 1,784,661 1,781,054 636,984 2,073,343 1,089,571 Total 13,946,270 As of December 31, 2022 Cumulative Number of Reported Claims 91,959 95,835 95,173 95,944 99,877 107,095 104,096 94,752 97,914 94,382 All Lines (in thousands) Accident Year 2013 2014 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2017 2016 2018 2015 2019 2020 2021 2022 $ 335,956 518,872 405,898 644,475 614,075 376,641 748,758 736,154 581,203 387,272 833,823 855,959 725,385 617,958 433,440 872,331 936,425 845,868 764,331 678,453 511,271 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 891,841 904,825 911,657 916,769 981,868 1,002,157 1,020,961 1,032,400 929,222 892,390 829,134 779,466 510,091 967,857 1,000,509 1,018,023 983,852 954,792 1,025,264 1,050,258 1,061,952 1,116,336 942,893 1,083,556 1,187,744 781,462 572,302 949,996 1,109,628 831,976 609,889 988,463 934,965 699,789 Total 10,066,069 All outstanding liabilities before 2013, net of reinsurance 379,073 Liabilities for loss and loss expenses, net of reinsurance 4,259,274 108 General Liability (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 250,609 251,421 239,776 225,709 210,785 203,831 202,697 195,697 192,782 189,594 244,312 249,946 257,132 239,333 234,082 237,125 229,679 230,247 228,933 254,720 245,710 246,990 233,249 219,204 214,176 211,768 210,137 277,214 272,048 277,986 263,245 252,733 246,643 243,669 293,747 293,128 301,384 289,883 278,607 283,379 317,934 336,326 345,224 332,013 324,567 12,561 18,901 19,932 30,556 46,761 92,627 347,150 356,363 358,301 366,184 154,311 361,554 360,302 352,834 201,089 422,748 414,279 287,278 482,590 409,505 Total 3,096,166 As of December 31, 2022 Cumulative Number of Reported Claims 10,462 10,704 10,565 10,825 11,324 11,802 11,575 9,645 10,136 8,988 General Liability (in thousands) Accident Year Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $ 12,789 35,113 14,901 72,127 46,825 14,665 104,587 79,972 39,978 15,684 139,114 121,969 78,668 46,549 17,366 153,628 154,957 116,804 89,431 49,470 19,531 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 163,764 179,192 144,216 133,757 92,355 60,784 18,097 169,847 187,352 157,071 164,136 131,980 108,421 58,284 21,858 172,983 198,772 173,697 181,770 167,002 155,538 100,206 58,699 28,069 174,987 204,212 179,117 199,032 201,948 197,286 160,680 100,356 71,664 31,502 All outstanding liabilities before 2013, net of reinsurance 113,263 Liabilities for loss and loss expenses, net of reinsurance 1,688,645 Total 1,520,784 Workers Compensation (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 199,794 194,318 187,658 173,160 166,662 162,787 159,767 157,645 153,436 149,975 199,346 187,065 182,579 172,515 164,420 160,646 159,604 161,021 158,479 193,729 194,639 183,604 179,642 176,242 172,572 170,577 169,008 196,774 184,946 176,248 166,009 156,540 155,210 151,961 195,202 184,306 175,853 162,672 154,159 151,221 193,894 193,818 181,151 173,428 167,974 188,625 188,596 174,912 164,940 168,643 168,594 159,229 185,198 185,151 16,818 17,598 18,790 21,205 19,961 25,963 32,088 44,323 74,474 207,206 116,968 Total 1,665,144 109 As of December 31, 2022 Cumulative Number of Reported Claims 11,385 10,498 10,554 10,586 10,813 11,133 10,324 7,534 8,547 8,517 Workers Compensation (in thousands) Accident Year 2013 2014 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2017 2016 2015 2019 2018 2020 2021 2022 $ 36,829 74,568 35,924 96,376 78,944 33,857 109,739 100,876 77,320 34,525 118,669 113,626 98,195 78,531 40,375 124,130 119,392 112,601 98,037 82,216 41,122 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 126,822 124,077 120,097 109,166 100,645 84,780 37,826 129,224 127,858 124,046 115,159 110,645 105,903 77,878 29,559 130,467 130,726 129,019 119,800 116,426 119,904 100,812 68,277 32,918 131,390 132,809 132,235 122,186 120,468 126,206 112,649 87,211 76,015 45,814 All outstanding liabilities before 2013, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 230,858 809,019 Total 1,086,983 Commercial Automobile (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 188,289 205,282 209,197 207,994 210,410 207,975 209,602 208,040 207,554 207,564 200,534 212,725 216,824 219,925 218,172 217,334 216,461 214,992 214,816 220,994 240,958 253,074 259,495 260,565 261,386 262,054 262,766 255,187 274,367 285,302 285,304 290,359 291,674 294,297 301,274 329,389 324,291 322,197 326,461 325,654 347,908 352,487 345,547 350,310 348,202 385,212 398,346 404,854 407,051 381,654 381,163 375,636 535 516 1,627 2,635 4,664 11,375 32,019 70,872 483,831 512,673 155,984 572,421 278,004 Total 3,521,080 Commercial Automobile (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance As of December 31, 2022 Cumulative Number of Reported Claims 26,221 28,263 30,085 32,041 33,345 36,002 36,375 30,343 36,843 36,909 Accident Year 2013 2014 2015 2016 $ 76,469 109,893 80,810 140,015 117,169 91,347 169,850 148,884 132,260 106,022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 200,750 202,821 211,515 200,701 178,823 134,867 202,622 209,655 238,142 233,939 220,422 193,788 149,538 205,064 212,481 249,905 264,858 262,349 243,713 221,590 139,016 206,162 213,689 255,600 277,242 296,600 291,725 283,410 198,034 187,200 206,641 213,847 257,668 284,870 309,810 319,819 331,152 254,365 283,411 216,180 All outstanding liabilities before 2013, net of reinsurance 4,650 Liabilities for loss and loss expenses, net of reinsurance 847,967 Total 2,677,763 Unaudited 2017 189,626 180,701 175,866 155,720 117,287 110 Businessowners' Policies (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 49,617 42,618 55,962 41,005 60,949 52,871 40,624 62,548 53,768 52,335 41,369 59,806 57,245 53,792 46,624 39,709 58,517 55,925 54,993 48,698 55,024 39,699 58,093 54,454 53,835 51,524 57,202 53,531 39,358 57,302 52,325 53,367 48,067 62,427 59,466 71,836 38,930 57,483 52,200 53,147 43,606 60,393 64,667 73,680 66,312 38,984 57,355 52,514 53,201 42,374 56,625 65,762 73,077 63,648 86,194 169 96 608 828 879 3,125 8,181 7,630 10,539 33,995 Total 589,734 Businessowners' Policies (in thousands) As of December 31, 2022 Cumulative Number of Reported Claims 3,484 4,067 3,968 3,854 3,895 4,262 3,639 5,421 3,454 3,074 Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $ 17,412 26,592 28,914 30,845 40,584 24,189 34,760 44,911 36,014 24,655 37,993 49,460 42,710 36,848 21,865 38,464 52,940 46,571 39,973 31,337 29,995 39,085 55,458 49,073 45,308 36,950 39,791 27,718 39,212 55,708 49,839 48,786 40,359 44,316 41,587 43,376 39,440 55,729 50,005 50,536 39,940 48,144 46,113 57,210 34,412 39,445 56,861 51,120 52,070 40,845 51,239 52,887 60,596 47,436 36,421 All outstanding liabilities before 2013, net of reinsurance 9,657 Liabilities for loss and loss expenses, net of reinsurance 110,471 Total 488,920 Commercial Property (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 88,101 90,639 90,103 90,005 90,436 90,278 90,218 90,486 90,461 90,799 141,192 136,249 136,820 138,751 138,155 136,212 136,237 136,151 136,112 110,270 109,513 111,750 111,566 112,496 112,582 112,937 112,915 121,927 126,185 125,937 124,487 123,567 123,005 123,126 138,773 149,106 149,044 153,664 154,119 154,942 183,177 190,834 192,558 194,016 196,413 173,826 177,075 179,574 180,605 232,060 225,278 226,107 246,319 239,822 4 5 9 14 20 47 230 2,023 4,672 297,318 56,716 Total 1,758,159 111 As of December 31, 2022 Cumulative Number of Reported Claims 5,716 6,517 6,407 6,743 6,906 8,293 7,315 10,147 7,942 7,224 Commercial Property (in thousands) Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $ 60,244 87,874 101,131 90,446 132,909 79,048 90,350 136,634 106,182 83,966 90,840 137,883 109,829 118,789 99,047 90,696 137,418 110,994 122,930 142,338 135,416 90,646 136,008 110,969 123,828 148,589 184,813 130,891 90,917 135,928 112,117 123,601 152,018 192,698 172,768 164,613 90,891 136,141 112,410 122,909 153,750 193,487 177,825 215,107 161,757 91,206 136,107 112,391 123,265 154,689 196,376 179,538 220,953 227,259 186,677 All outstanding liabilities before 2013, net of reinsurance 579 Liabilities for loss and loss expenses, net of reinsurance 130,277 Total 1,628,461 Personal Automobile (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 108,417 109,620 106,225 106,703 107,759 107,680 107,916 107,803 107,754 107,758 102,250 109,325 106,757 107,452 106,821 107,104 107,106 107,566 107,543 96,387 99,698 100,214 99,570 98,718 92,727 98,032 100,202 101,140 98,588 99,544 98,596 98,669 99,858 100,395 101,880 105,139 103,653 103,260 103,557 105,079 111,594 113,569 112,030 112,418 113,647 114,043 115,688 115,993 118,669 95,625 94,532 90,179 108,244 102,777 121,030 Total 1,065,746 57 47 117 409 710 2,098 4,163 6,584 10,411 26,632 As of December 31, 2022 Cumulative Number of Reported Claims 22,376 22,509 20,865 19,827 20,748 22,684 22,860 17,533 19,672 20,345 Personal Automobile (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $ 61,384 80,861 62,519 92,637 83,739 58,725 100,528 105,131 92,589 76,470 57,961 99,173 87,163 76,823 62,854 106,679 104,055 92,102 86,752 82,730 69,721 106,876 105,709 95,997 94,372 91,479 89,628 69,699 107,419 106,478 97,275 98,080 97,628 99,982 92,162 53,407 107,423 107,108 97,761 98,977 100,521 107,026 102,930 68,691 65,325 107,417 107,325 97,920 99,656 103,556 109,644 109,844 76,710 84,743 75,994 Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 All outstanding liabilities before 2013, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 7,045 99,982 Total 972,809 112 Homeowners (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 73,670 72,528 80,111 71,494 82,461 76,637 72,145 83,637 76,400 60,105 71,714 83,844 76,559 60,931 59,167 72,148 83,539 74,723 62,391 67,978 62,961 72,318 83,824 74,978 61,723 70,365 68,526 64,306 71,948 83,525 74,673 61,735 70,064 69,832 72,772 71,955 83,830 74,682 60,855 68,938 68,931 73,816 71,960 83,819 74,237 60,841 68,902 68,416 73,070 109,033 112,523 113,804 82,425 83,295 93,826 Total 792,170 67 60 20 438 504 608 1,412 3,611 3,657 17,362 As of December 31, 2022 Cumulative Number of Reported Claims 7,753 8,776 7,753 6,896 7,389 7,608 7,010 9,824 6,884 5,819 Homeowners (in thousands) Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $ 50,664 65,528 61,561 67,838 76,007 52,589 69,775 79,751 70,078 42,252 71,776 81,664 72,202 57,333 45,466 72,197 82,583 72,927 59,546 63,290 49,430 72,433 82,836 74,079 60,082 67,193 64,137 49,680 72,446 82,831 74,052 61,187 67,767 65,348 67,631 83,838 72,447 83,321 74,096 60,449 68,078 66,634 69,911 105,690 59,054 72,415 83,782 74,108 60,474 68,282 67,739 70,880 109,145 77,018 68,832 All outstanding liabilities before 2013, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 6,102 45,597 Total 752,675 E&S Casualty Lines (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 IBNR $ 55,468 $ 60,309 55,316 67,099 63,505 75,498 69,112 69,929 76,432 94,451 67,647 71,719 82,404 68,972 71,206 90,488 68,451 71,153 90,355 68,029 70,846 90,126 60,349 74,270 87,662 60,511 74,538 90,263 96,416 104,655 105,120 104,730 102,476 101,873 91,438 95,783 99,866 99,395 99,960 102,045 98,324 103,004 103,184 104,983 105,756 117,087 118,298 117,736 117,113 103,872 103,137 95,832 128,099 125,436 3,504 4,918 4,646 12,138 11,390 17,093 39,429 49,633 89,909 146,999 132,276 Total 1,020,366 113 As of December 31, 2022 Cumulative Number of Reported Claims 2,311 2,141 2,887 2,998 2,848 2,816 2,683 1,788 1,751 1,285 E&S Casualty Lines (in thousands) Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $ 2,715 $ 9,470 2,353 21,980 12,234 3,036 35,200 25,571 13,057 3,720 46,108 43,877 29,389 16,195 5,057 51,142 53,780 50,712 33,950 14,672 5,509 54,974 60,092 64,529 56,581 34,179 21,337 4,422 55,988 64,698 71,421 69,448 53,238 39,174 17,812 3,695 57,152 66,661 75,844 75,004 68,266 57,962 35,844 13,064 4,326 58,584 68,648 81,396 81,932 77,090 73,605 57,701 27,861 15,835 4,198 All outstanding liabilities before 2013, net of reinsurance 5,991 Liabilities for loss and loss expenses, net of reinsurance 479,507 Total 546,850 114 (e) The reconciliation of the net incurred and paid claims development tables to the liability for loss and loss expenses in the consolidated statement of financial position is as follows: (in thousands) Net outstanding liabilities: Standard Commercial Lines General liability Workers compensation Commercial automobile Businessowners' policies Commercial property Other Standard Commercial Lines Total Standard Commercial Lines net outstanding liabilities Standard Personal Lines Personal automobile Homeowners Other Standard Personal Lines Total Standard Personal Lines net outstanding liabilities E&S Lines Casualty lines Property lines Total E&S Lines net outstanding liabilities Total liabilities for unpaid loss and loss expenses, net of reinsurance Reinsurance recoverable on unpaid claims: Standard Commercial Lines General liability Workers compensation Commercial automobile Businessowners' policies Commercial property Other Standard Commercial Lines Total Standard Commercial Lines reinsurance recoverable on unpaid loss Standard Personal Lines Personal automobile Homeowners Other Standard Personal Lines Total Standard Personal Lines reinsurance recoverable on unpaid loss E&S Lines Casualty lines Property lines Total E&S Lines reinsurance recoverable on unpaid loss Total reinsurance recoverable on unpaid loss Unallocated loss expenses December 31, 2022 $ 1,688,645 809,019 847,967 110,471 130,277 17,995 3,604,374 99,982 45,597 11,739 157,318 479,507 18,075 497,582 4,259,274 246,736 199,057 14,271 19,277 81,970 4,443 565,754 36,529 7,124 132,525 176,178 11,397 4,184 15,581 757,513 128,034 Total gross liability for unpaid loss and loss expenses $ 5,144,821 115 (f) The table below reflects the historical average annual percentage payout of incurred claims by age. For example, the general liability line of business averages payout of 6.3% of its ultimate losses in the first year, 11.8% in the second year, and so forth. The following is supplementary information about average historical claims duration as of December 31, 2022: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years General liability Workers compensation Commercial automobile Businessowners’ policies Commercial property Personal automobile Homeowners E&S Lines - casualty 1 6.3% 22.3 36.8 49.0 68.7 59.8 70.8 3.9 2 11.8 25.9 16.9 21.8 26.4 18.1 21.8 11.5 3 15.5 13.9 14.6 8.3 3.2 8.8 3.5 4 17.4 8.9 13.3 8.1 1.0 6.5 1.6 5 15.1 4.7 9.9 6.1 0.4 3.7 1.7 18.0 21.7 15.8 6 9.9 3.0 4.2 3.1 — 1.7 0.2 7.9 7 7.2 1.9 1.9 1.3 — 0.5 0.2 6.8 8 4.1 1.8 1.1 0.6 — 0.4 0.1 5.2 9 3.0 3.1 0.7 0.3 — 0.2 0.1 2.6 10 2.1 2.2 0.1 0.2 — 0.1 — 3.5 Note 11. Indebtedness The table below provides a summary of our outstanding debt at December 31, 2022 and 2021: Outstanding Debt ($ in thousands) Description Long term (1) Senior Notes (2) FHLBI (3) Senior Notes (4) Senior Notes Finance lease obligations Total long-term debt Issuance Date Maturity Date Interest Rate Original Amount Unamortized Issuance Costs Debt Discount December 31, 2022 December 31, 2021 2022 Carry Value 3/1/2019 3/1/2049 5.375 % 300,000 $ 2,543 5,576 291,881 291,597 12/16/2016 12/16/2026 11/3/2005 11/1/2035 11/16/2004 11/15/2034 3.03 % 6.70 % 7.25 % 60,000 100,000 50,000 — 256 130 — 458 79 $ 2,929 6,113 60,000 99,286 49,791 3,718 504,676 60,000 99,233 49,770 5,450 506,050 On November 7, 2022, the Parent entered into a Credit Agreement (the “Line of Credit”) among the Parent, the lenders named therein (the “Lenders”), and Wells Fargo Bank, National Association, as Administrative Agent. Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility, which can be increased to $125 million with the consent of the Lenders. The Line of Credit will mature on November 7, 2025, and has a variable interest rate based on the Parent’s debt ratings. The Parent, as borrower, was a party to a Credit Agreement dated December 20, 2019, for a $50 million revolving credit facility, which could be increased to $125 million with the consent of the lenders, with the lenders named therein, and Bank of Montreal, Chicago Branch, as Administrative Agent (“Bank of Montreal”), which was scheduled to mature on December 20, 2022 (the “Prior Credit Agreement”). In anticipation of entering into the Line of Credit, the Parent exercised termination rights under the Prior Credit Agreement by sending a termination letter to Bank of Montreal on November 3, 2022. The effective date of the termination of the Prior Credit Agreement was November 7, 2022. Our Line of Credit contains representations, warranties, and covenants that are customary for credit facilities of this type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net worth, a maximum ratio of consolidated debt to total capitalization, and covenants limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make investments and acquisitions; and (v) engage in transactions with affiliates. The table below outlines information regarding certain covenants in the Line of Credit: Consolidated net worth1 Debt to total capitalization ratio1 1Calculated in accordance with the Line of Credit. Required as of December 31, 2022 Not less than $1.9 billion Not to exceed 35% Actual as of December 31, 2022 $3 billion 14.3% In addition to the above requirements, the Line of Credit contains a cross-default provision that provides that the Line of Credit will be in default if we fail to comply with any condition, covenant, or agreement (including payment of principal and interest when due on any debt with an aggregate principal amount of at least $30 million), which causes or permits the acceleration of 116 principal. Additionally, the Line of Credit limits borrowings from the FHLBI and the FHLBNY to 10% of the respective member company's admitted assets for the previous year. Short-term Debt Activity (1) On April 1, 2022, SICA borrowed short-term funds of $35 million from the FHLBNY at an interest rate of 0.7%. This borrowing was refinanced and extended through June 27, 2022, at an interest rate of 1.10%. This borrowing was repaid on June 27, 2022. (2) On October 3, 2022, SICA borrowed short-term funds of $25 million from the FHLBNY at an interest rate of 3.21%. This borrowing was repaid on November 3, 2022. Long-term Debt Activity (1) In the first quarter of 2019, we issued $300 million of 5.375% Senior Notes due 2049 at a discount of $5.9 million which, when coupled with debt issuance costs of approximately $3.3 million, resulted in net proceeds from the offering of $290.8 million. The 5.375% Senior Notes pay interest on March 1 and September 1 of each year. The first payment was made on September 1, 2019. A portion of the proceeds from this debt issuance was used to fully redeem the $185 million aggregate principal amount of our 5.875% Senior Notes due 2043, with the remaining $106 million being used for general corporate purposes. The 5.875% Senior Notes had pre-tax debt retirement costs of $4.2 million, or $3.3 million after tax, which was recorded in Interest expense on the Consolidated Statements of Income in the first quarter of 2019. There are no financial debt covenants to which we are required to comply in regards to the 5.375% Senior Notes. (2) In the first quarter of 2009, Selective Insurance Company of South Carolina ("SICSC") and Selective Insurance Company of the Southeast ("SICSE"), which are collectively referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana, joined, and invested in, the FHLBI, which provides them with access to additional liquidity. The Indiana Subsidiaries’ aggregate investment in the FHLBI was $5.2 million at December 31, 2022 and $5.7 million at December 31, 2021. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBI common stock purchased with additional collateral, at comparatively low borrowing rates. The proceeds from the FHLBI borrowing on December 16, 2016 of $60 million were used to repay a $45 million borrowing from the FHLBI that was outstanding at the time, with the remaining $15 million used for general corporate purposes. All borrowings from the FHLBI require security. There are no financial debt covenants to which we are required to comply with in regards to these borrowings. For information on investments that are pledged as collateral for these borrowings, see Note 5. "Investments" above. (3) In November 2005, we issued $100 million of 6.70% Senior Notes due 2035. These notes were issued at a discount of $0.7 million resulting in an effective yield of 6.754%. Net proceeds of approximately $50 million were used to fund an irrevocable trust that subsequently funded certain payment obligations in respect of our outstanding debt. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 6.70% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with the 6.70% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes. (4) In November 2004, we issued $50 million of 7.25% Senior Notes due 2034. These notes were issued at a discount of $0.1 million, resulting in an effective yield of 7.27%. We contributed $25 million of the bond proceeds to the Insurance Subsidiaries as capital. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 7.25% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with the 7.25% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes. Note 12. Segment Information We evaluate the results of our four reportable segments as follows: • • Our Standard Commercial Lines, Standard Personal Lines, and E&S Lines are evaluated on before and after-tax underwriting results (net premiums earned, incurred loss and loss expense, policyholders dividends, policy acquisition costs, and other underwriting expenses), return on equity ("ROE") contribution, and combined ratios. Our Investments segment is primarily evaluated on after-tax net investment income and its ROE contribution. After-tax net realized and unrealized gains and losses are also included in our Investment segment results. 117 In computing each segment's results, we do not make adjustments for interest expense or corporate expenses. No segment has a separate investment portfolio or allocated assets. Our combined insurance operations are subject to certain geographic concentrations, particularly in the Eastern region of the country. In 2022, approximately 17% of NPW were related to insurance policies written in New Jersey. We also had a goodwill balance of $7.8 million at both December 31, 2022 and 2021 on our Consolidated Balance Sheet that relates to our Standard Commercial Lines reporting unit. The following summaries present revenues (net investment income and net realized and unrealized gains and losses on investments in the case of the Investments segment) and pre-tax income for the individual segments: Revenue by Segment ($ in thousands) Standard Commercial Lines: Net premiums earned: General liability Commercial automobile Commercial property Workers compensation Businessowners’ policies Bonds Other Miscellaneous income Total Standard Commercial Lines revenue Standard Personal Lines: Net premiums earned: Personal automobile Homeowners Other Miscellaneous income Total Standard Personal Lines revenue E&S Lines: Net premiums earned: Casualty lines Property lines Total E&S Lines revenue Investments: Years ended December 31, 2021 2020 2022 $ 902,428 812,306 495,647 335,955 124,474 43,354 25,655 9,519 2,749,338 162,899 128,222 8,284 1,816 301,221 233,086 101,070 334,156 807,158 724,398 436,412 306,428 110,622 35,762 23,105 16,056 2,459,941 163,007 122,526 8,026 1,667 295,226 197,779 82,030 279,809 326,589 17,599 344,188 3,379,164 694,019 615,181 388,120 278,062 110,210 36,742 20,850 15,512 2,158,696 165,020 125,405 8,715 2,058 301,198 174,408 65,082 239,490 227,107 (4,217) 222,890 2,922,274 Net investment income Net realized and unrealized investment (losses) gains Total Investments revenues Total revenues 288,155 (114,808) 173,347 3,558,062 $ 118 Income Before and After Federal Income Tax ($ in thousands) Standard Commercial Lines: Underwriting income, before federal income tax Underwriting income, after federal income tax Combined ratio ROE contribution Standard Personal Lines: Underwriting income (loss), before federal income tax Underwriting income (loss), after federal income tax Combined ratio ROE contribution E&S Lines: Underwriting income, before federal income tax Underwriting income, after federal income tax Combined ratio ROE contribution Investments: Net investment income earned Net realized and unrealized investment (losses) gains Total investment segment income, before federal income tax Tax on investment segment income Total investment segment income, after federal income tax ROE contribution of after-tax net investment income earned Reconciliation of Segment Results to Income Before Federal Income Tax ($ in thousands) Underwriting income (loss) Standard Commercial Lines Standard Personal Lines E&S Lines Investment income Total all segments Interest expense Corporate expenses Income, before federal income tax Preferred stock dividends Income available to common stockholders, before federal income tax Years ended December 31, 2021 2020 2022 $ 143,696 113,520 94.8 % 4.6 % (7,193) (5,682) 102.4 % (0.2) % 30,299 23,936 90.9 % 1.0 % 288,155 (114,808) 173,347 31,846 141,501 9.4 % 198,596 156,891 91.9 % 5.9 3,966 3,133 98.6 % 0.1 16,030 12,664 94.3 % 0.5 326,589 17,599 344,188 67,284 276,904 9.9 151,731 119,867 92.9 % 5.1 (15,508) (12,251) 105.2 % (0.5) 126 100 99.9 % — 227,107 (4,217) 222,890 41,609 181,281 7.8 Years ended December 31, 2021 2020 2022 143,696 (7,193) 30,299 173,347 340,149 (28,847) (31,116) 280,186 (9,200) 270,986 $ 198,596 3,966 16,030 344,188 562,780 (29,165) (28,305) 505,310 (9,353) 495,957 $ 151,731 (15,508) 126 222,890 359,239 (30,839) (25,412) 302,988 — 302,988 $ $ $ $ $ Note 13. Earnings per Share The following table presents the calculations of earnings per common share ("EPS") on a basic and diluted basis: ($ in thousands, except per share amounts) Net income available to common stockholders: 2022 2021 2020 $ 215,686 394,484 246,355 Weighted average common shares outstanding: Weighted average common shares outstanding - basic Effect of dilutive securities - stock compensation plans Weighted average common shares outstanding - diluted EPS: Basic Diluted 60,407 468 60,875 3.57 3.54 $ 60,183 484 60,667 6.55 6.50 59,862 431 60,293 4.12 4.09 119 Note 14. Federal Income Taxes (a) A reconciliation of federal income tax on income at the corporate rate (21.0%) to the effective tax rate is as follows: ($ in thousands) Tax at statutory rate Tax-advantaged interest Dividends received deduction Executive compensation Stock-based compensation Other Federal income tax expense Income before federal income tax, less preferred stock dividends Effective tax rate $ 2022 58,839 (4,087) (469) 1,848 (893) 62 55,300 270,986 2021 106,115 (4,514) (558) 2,469 (693) (1,346) 101,473 495,957 2020 63,627 (4,730) (514) 2,246 (1,846) (2,150) 56,633 302,988 20.4 % 20.5 % 18.7 % (b) The tax effects of the significant temporary differences that gave rise to deferred tax assets and liabilities were as follows: ($ in thousands) Deferred tax assets: Net loss reserve discounting Net unearned premiums Employee benefits Long-term incentive compensation Unrealized losses on fixed income securities Temporary investment write-downs Other Total deferred tax assets Deferred tax liabilities: Deferred policy acquisition costs Unrealized gains on investment securities Other investment-related items, net Accelerated depreciation and amortization Total deferred tax liabilities Net deferred federal income tax assets (liabilities) 2022 2021 $ $ 65,907 76,513 7,064 6,384 110,857 12,480 9,824 289,029 77,411 — 26,713 12,172 116,296 172,733 60,227 68,086 2,787 5,904 — 4,314 2,245 143,563 68,652 48,082 27,044 13,198 156,976 (13,413) The increase in net deferred federal income tax assets was primarily due to an increase in unrealized losses on our investment portfolio resulting from an increase in benchmark U.S. Treasury rates, and to a lesser extent the widening of credit spreads. After considering all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, we believe it is more likely than not that the existing deductible temporary differences will reverse during periods in which we generate net federal taxable income or have adequate federal carryback availability. As a result, we had no valuation allowance recognized for federal deferred tax assets at December 31, 2022 or 2021. We did not have unrecognized tax expense or benefit as of December 31, 2022. We have analyzed our tax positions in all open tax years, which as of December 31, 2022 were 2019 through 2022. We believe our tax positions will more likely than not be sustained upon examination, including related appeals or litigation. In the event we had a tax position that did not meet the more likely than not criteria, any tax, interest, and penalties incurred related to such a position would be reflected in "Total federal income tax expense" on our Consolidated Statements of Income. Note 15. Retirement Plans (a) Selective Insurance Retirement Savings Plan (“Retirement Savings Plan”) and the Selective Insurance Company of America Deferred Compensation Plan ("Deferred Compensation Plan") SICA offers a voluntary defined contribution 401(k) plan that is available to most of our employees and is a tax-qualified retirement plan subject to ERISA. In addition, SICA offers a Deferred Compensation Plan to a group of management or highly compensated employees as a method of recognizing and retaining such employees. Expenses recorded for these plans were $19.8 million in 2022, $19.2 million in 2021, and $18.6 million in 2020. (b) Retirement Income Plan SICA maintains a defined benefit pension plan, the Retirement Income Plan for Selective Insurance Company of America (the "Pension Plan"). This qualified, noncontributory plan is closed to new entrants, and existing participants ceased accruing benefits after March 31, 2016. 120 The following tables provide details on the Pension Plan for 2022 and 2021: December 31, ($ in thousands) Change in Benefit Obligation: Benefit obligation, beginning of year Interest cost Actuarial gains Benefits paid Benefit obligation, end of year Change in Fair Value of Assets: Fair value of assets, beginning of year Actual return on plan assets, net of expenses Benefits paid Fair value of assets, end of year Funded status Amounts Recognized in the Consolidated Balance Sheet: Net pension assets, end of year Amounts Recognized in AOCI: Net actuarial loss Other Information as of December 31: Accumulated benefit obligation Weighted-Average Liability Assumptions as of December 31: Discount rate Pension Plan 2022 2021 $ $ $ $ $ $ $ $ 407,758 9,944 (91,653) (14,104) 311,945 450,305 (93,227) (14,104) 342,974 31,029 31,029 100,561 311,945 5.21 % 425,161 8,593 (12,844) (13,152) 407,758 432,716 30,741 (13,152) 450,305 42,547 42,547 78,304 407,758 2.98 When determining the most appropriate discount rate to be used in the valuation at December 31, 2022, we consider, among other factors, our expected payout patterns of the Pension Plan's obligations as well as our investment strategy. We ultimately select the rate that we believe best represents our estimate of the inherent interest rate at which our pension benefits can be effectively settled. The approach we utilize discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. Our discount rate increased 223 basis points, to 5.21% as of December 31, 2022, from 2.98% as of December 31, 2021, which drove the decrease in the benefit obligation for the period. ($ in thousands) Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income: 2022 Pension Plan 2021 2020 Net Periodic Benefit Cost (Benefit): Interest cost Expected return on plan assets Amortization of unrecognized actuarial loss Total net periodic pension cost (benefit)1 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: Net actuarial loss (gain) Reversal of amortization of net actuarial loss Total recognized in other comprehensive income $ $ $ $ 9,944 (22,147) 1,465 (10,738) 23,722 (1,465) 22,257 8,593 (22,976) 2,501 (11,882) (20,609) (2,501) (23,110) Total recognized in net periodic benefit cost and other comprehensive income 1The components of net periodic pension cost (benefit) are included within "Loss and loss expense incurred" and "Other insurance expenses" on the Consolidated Statements of Income. (34,992) 11,519 $ 11,312 (21,907) 2,817 (7,778) (2,894) (2,817) (5,711) (13,489) 121 Weighted-Average Expense Assumptions for the years ended December 31: Discount rate Interest rate Expected return on plan assets 2022 Pension Plan 2021 2020 2.98 % 2.48 % 5.00 2.68 % 2.06 % 5.40 3.33 % 2.95 % 5.80 Pension Plan Assets Assets of the Pension Plan are invested to adequately support the liability associated with the Pension Plan's defined benefit obligation. Our return objective is to exceed the returns of the plan's policy benchmark, which is the return the plan would have earned if the assets were invested according to the target asset class weightings and earned index returns shown below. In 2023, we will continue to phase in adjustments to the asset allocation to steadily close the gap between the duration of the assets and the duration of the liabilities, provided certain improved funding targets are achieved. Over time, the target and actual asset allocations may change based on the funded status of the Pension Plan and market return expectations. The Pension Plan’s target ranges, as well as the actual weighted average asset allocation by strategy, at December 31 were as follows: Return seeking assets1 Liability hedging assets Short-term investments Total 1Includes limited partnerships. 2022 Target Percentage Actual Percentage Minimum Maximum 2021 Actual Percentage 50 % 20 % - 80 % 50 % - 71 % 27 % 2 % 100 % 66 % 33 % 1 % 100 % The use of derivative instruments is permitted under certain circumstances for the Pension Plan portfolio, but may not be used for unrelated speculative purposes or to create exposures that are not permitted in the Pension Plan's investment guidelines. We currently invest in a U.S. Treasury overlay derivative strategy, within the funds in our liability hedging assets, to manage the interest rate duration mismatch between the assets and liabilities of the Pension Plan to help insulate the funded status of the plan. Considering the impact of this derivative overlay, the liability hedging assets provide for an approximate 77% hedge against the projected benefit obligation. The Pension Plan had no investments in the Parent’s common stock as of December 31, 2022 or 2021. For information regarding investments in funds of our related parties, refer to Note 18. "Related Party Transactions" below. The techniques used to determine the fair value of the Pension Plan's invested assets that appear on the following page are as follows: • • • • The investments in the equities and liability hedging funds include collective investment funds and fund of funds that utilize a market approach wherein the published prices in the active market for identical assets are used. These investments are traded at their net asset value per share. These investments are classified as Level 1 in the fair value hierarchy. The investments in private limited partnerships are valued utilizing net asset value as a practical expedient for fair value. These investments are not classified in the fair value hierarchy. Short-term investments are recorded at fair value. Given that these investments are listed on active exchanges, coupled with their liquid nature, these investments are classified as Level 1 in the fair value hierarchy. The deposit administration contract is recorded at cost, which approximates fair value. Given the liquid nature of the underlying investments in overnight cash deposits and other short-term duration products, we have determined that a correlation exists between the deposit administration contract and other short-term investments, such as money market funds. As such, this investment is classified as Level 2 in the fair value hierarchy. For discussion regarding the levels within the fair value hierarchy, see Note 2. "Summary of Significant Accounting Policies." In addition, refer to Note 5. "Investments" for discussion regarding the primary private equity, venture capital, and real asset limited partnership investment strategies as these investments are part of the Pension Plan's investment portfolio. 122 The following tables provide quantitative disclosures of the Pension Plan’s invested assets that are measured at fair value on a recurring basis: December 31, 2022 Fair Value Measurements at 12/31/22 Using Assets Measured at Fair Value At 12/31/22 Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) — — — — — — — — — — — — — 2,740 2,740 2,740 — — — — — — — — — — — — — — — — ($ in thousands) Description Return seeking assets: Equities: Global equity Diversified credit Real assets Liquid diversifiers1 Total equities Limited partnerships (at net asset value)2: Real assets Private equity Total limited partnerships Total return seeking assets Liability hedging assets: Fixed income U.S. Treasury overlay Total liability hedging assets Cash and short-term investments: Short-term investments Deposit administration contracts Total cash and short-term investments $ 63,852 58,761 95,396 23,978 241,987 27 331 358 242,345 35,378 56,255 91,633 5,108 2,740 7,848 63,852 58,761 95,396 23,978 241,987 — — — 241,987 35,378 56,255 91,633 5,108 — 5,108 Total invested assets $ 341,826 338,728 123 December 31, 2021 Fair Value Measurements at 12/31/21 Using Assets Measured at Fair Value At 12/31/21 Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) ($ in thousands) Description Return seeking assets: Equities: Global equity Diversified credit Real assets Total equities Limited partnerships (at net asset value)2: Real assets Private equity Total limited partnerships Total return seeking assets Liability hedging assets: Fixed income U.S. Treasury overlay Total liability hedging assets Cash and short-term investments: Short-term investments Deposit administration contracts Total cash and short-term investments $ 144,634 66,165 89,590 300,389 47 413 460 300,849 86,183 65,304 151,487 1,744 2,422 4,166 144,634 66,165 89,590 300,389 — — — 300,389 86,183 65,304 151,487 1,744 — 1,744 — — — — — — — — — — — — 2,422 2,422 2,422 — — — — — — — — — — — — — — — Total invested assets $ 456,502 453,620 1 Liquid diversifiers are investments that unbundle return drivers from hedge funds, providing investors access to liquid, diversifying returns. 2In accordance with the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), certain investments that are measured at fair value using the net asset value per share (or its practical expedient) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total Pension Plan invested assets. Contributions We presently do not anticipate contributing to the Pension Plan in 2023, as we have no minimum required contribution amounts. Benefit Payments ($ in thousands) Benefits Expected to be Paid in Future Fiscal Years: 2023 2024 2025 2026 2027 2028-2032 Note 16. Share-Based Payments Pension Plan $ 16,925 17,265 18,317 19,391 20,328 111,842 Active Plans As of December 31, 2022, the following four plans were available for the issuance of share-based payment awards: The 2014 Omnibus Stock Plan, As Amended and Restated Effective as of May 2, 2018 (the "Stock Plan"); The Cash Incentive Plan, As Amended and Restated as of May 1, 2014 (the "Cash Plan"); The Employee Stock Purchase Plan, As Amended and Restated as of July 1, 2021 ("ESPP"); and The Amended and Restated Stock Purchase Plan for Independent Insurance Agencies (2010), Amended and Restated as of November 1, 2020 (the "Agent Plan"). • • • • 124 The following table provides information regarding the approval of these plans: Plan Stock Plan Cash Plan ESPP Agent Plan Approvals Approved effective as of May 1, 2014 by stockholders on April 23, 2014. Most recently amended and restated plan was approved effective May 2, 2018 by stockholders on May 2, 2018. Approved effective April 1, 2005 by stockholders on April 27, 2005. Most recently amended and restated plan was approved effective May 1, 2014 by stockholders on April 23, 2014. Approved effective July 1, 2009 by stockholders on April 29, 2009. Most recently amended and restated plan was approved effective July 1, 2021 by stockholders on April 28, 2021. Approved by stockholders on April 26, 2006. Most recently amended and restated plan was approved effective November 1, 2020 by the Salary and Employee Benefits Committee of the Parent's Board on October 26, 2020. The types of awards that can be issued under each of these plans are as follows: Plan Stock Plan Cash Plan ESPP Agent Plan Types of Share-Based Payments Issued Qualified and nonqualified stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), stock grants, and other awards valued in whole or in part by reference to the Parent's common stock. The maximum exercise period for an option grant under this plan is 10 years from the date of the grant. Dividend equivalent units ("DEUs") are earned during the vesting period on RSU grants. The DEUs are reinvested in the Parent's common stock at fair value on each dividend payment date. The requisite service period for grants to employees under this plan is the lesser of: (i) the stated vested date, which is typically three years from issuance; or (ii) the date the employee becomes eligible to retire. Cash incentive units (“CIUs”). The initial dollar value of each CIU will be adjusted to reflect the percentage increase or decrease in the total shareholder return on the Parent's common stock over a specified performance period. In addition, for certain grants, the number of CIUs granted will be increased or decreased to reflect our performance on specified performance indicators compared to targeted peer companies. The requisite service period for grants under this plan is the lesser of: (i) the stated vested date, which is typically three years from issuance; or (ii) the date the employee becomes eligible to retire. Enables employees to purchase shares of the Parent’s common stock. The purchase price is the lower of: (i) 85% of the closing market price at the time the option is granted; or (ii) 85% of the closing price at the time the option is exercised. Shares are generally issued on June 30 and December 31 of each year. Quarterly offerings to purchase the Parent's common stock at a 10% discount with a one-year restricted period during which the shares purchased cannot be sold or transferred. Only our independent retail insurance agencies and wholesale general agencies, and certain eligible persons associated with the agencies, are eligible to participate in this plan. Shares authorized and available for issuance as of December 31, 2022 were as follows: Stock Plan ESPP Agent Plan Authorized 4,750,000 5,500,000 3,000,000 Available for Issuance 2,474,585 1,116,863 1,551,498 Awards Outstanding 657,311 — — Retired Plans The following plans are closed for the issuance of new awards as of December 31, 2022, although awards outstanding continue in effect according to the terms of the applicable award agreements: Plan Types of Share-Based Payments Issued Reserve Shares Awards Outstanding1 2005 Omnibus Stock Plan ("2005 Stock Plan") Qualified and nonqualified stock options, SARs, restricted stock, RSUs, phantom stock, stock bonuses, and other awards in such amounts and with such terms and conditions as it determined, subject to the provisions of the 2005 Stock Plan. The maximum exercise period for an option grant under this plan is 10 years from the date of the grant. DEUs are earned during the vesting period on RSU grants. The DEUs are reinvested in the Parent's common stock at fair value on each dividend payment date. 1,954,922 29,522 Parent's Stock Compensation Plan for Non-employee Directors Directors could elect to receive a portion of their annual compensation in shares of the Parent's common stock. 40,940 40,940 1Awards outstanding under the 2005 Stock Plan represent shares deferred by our non-employee directors. 125 RSU Transactions A summary of the RSU transactions under our share-based payment plans is as follows: Number of Shares Unvested RSU awards at December 31, 2021 Granted 2022 Vested 2022 Forfeited 2022 Unvested RSU awards at December 31, 2022 Weighted Average Grant Date Fair Value 63.73 76.09 63.79 66.77 68.84 641,636 $ 248,619 (232,742) (20,451) 637,062 $ As of December 31, 2022, total unrecognized compensation expense related to unvested RSU awards granted under our Stock Plan was $11.3 million. That expense is expected to be recognized over a weighted-average period of 1.7 years. The total intrinsic value of RSUs vested was $18.1 million for 2022, $17.2 million for 2021, and $20.6 million for 2020. In connection with vested RSUs, the total value of the DEUs that vested was $0.7 million in 2022, $0.6 million in 2021, and $0.7 million in 2020. CIU Transactions The liability recorded in connection with our Cash Plan was $11.1 million as of December 31, 2022, and $11.0 million as of December 31, 2021. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period of 1.1 years. The CIU payments made in connection with the CIU vestings were $2.9 million in 2022, $2.2 million in 2021, and $2.3 million in 2020. ESPP and Agent Plan Transactions A summary of ESPP and Agent Plan share issuances is as follows: ESPP Issuances Agent Plan Issuances 2022 2021 2020 67,986 56,736 72,239 50,999 99,141 69,238 Fair Value Measurements The grant date fair value of RSUs is based on the market price of our common stock on the grant date, adjusted for the present value of our expected dividend payments. The expense recognized for share-based awards is based on the number of shares or units expected to be issued at the end of the performance period and the grant date fair value. The grant date fair value of each option award is estimated using the Black Scholes option valuation model ("Black Scholes"). The following are the significant assumptions used in applying Black Scholes: (i) the risk-free interest rate, which is the implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) the expected term, which is based on historical experience of similar awards; (iii) the dividend yield, which is determined by dividing the expected per share dividend during the coming year by the grant date stock price; and (iv) the expected volatility, which is based on the volatility of the Parent's stock price over a historical period comparable to the expected term. In applying Black Scholes, we use the weighted average assumptions illustrated in the following table: Risk-free interest rate Expected term Dividend yield Expected volatility 2022 1.42 % 6 months 1.3 % 21 % ESPP 2021 0.07 6 months 1.4 28 2020 0.76 6 months 1.6 37 126 The weighted-average fair value per share of options and stock, including RSUs granted under the Parent's stock plans, during 2022, 2021, and 2020 was as follows: RSUs ESPP: Six month option Discount of grant date market value Total ESPP Agent Plan: Discount of grant date market value 2022 2021 2020 $ 76.09 4.43 12.61 17.04 8.28 64.03 4.69 10.98 15.67 7.57 62.91 4.82 8.61 13.43 5.73 The fair value of the CIU liability is remeasured at each reporting period through the settlement date of the awards, which is three years from the date of grant, based on an amount expected to be paid. A Monte Carlo simulation is performed to approximate the projected fair value of the CIUs that, in accordance with the CIU agreements established under the Cash Plan, is adjusted to reflect our performance on specified indicators compared to targeted peer companies. Expense Recognition The following table provides share-based compensation expense in 2022, 2021, and 2020: ($ in millions) Share-based compensation expense, pre-tax Income tax benefit, including the benefit related to stock grants that vested during the year Share-based compensation expense, after-tax 2022 2021 2020 $ $ 23.6 (5.6) 18.0 22.3 (5.1) 17.2 19.8 (5.7) 14.1 Note 17. Equity Preferred Stock We have 5,000,000 shares of preferred stock authorized, with no par value, of which (i) 300,000 shares are designated Series A junior preferred stock, which have not been issued, and (ii) 8,000 shares were issued as Series B in 2020 as discussed below. On December 2, 2020, we issued 8.0 million depository shares, each representing a 1/1,000th interest in a share of our perpetual 4.60% Non-Cumulative Preferred Stock, Series B, without par value, with a liquidation preference of $25,000 per share (equivalent to $25.00 per depository share) (“Preferred Stock”), for net proceeds of $194.6 million. Dividends are recorded when declared and, if declared, are payable quarterly in arrears on the 15th day of March, June, September, and December. If a dividend is not declared and paid or made payable on all outstanding shares of the Preferred Stock for the latest completed dividend period, no dividends may be declared or paid on our common stock and we may not purchase, redeem, or otherwise acquire our outstanding common stock. The Preferred Stock is redeemable at our option in whole or in part, from time to time, on or after December 15, 2025 at a redemption price equal to $25,000 per share of Preferred Stock (equivalent to $25.00 per depository share), plus unpaid dividends attributable to the then current dividend period. Prior to December 15, 2025, the Preferred Stock is redeemable at the Company’s option, in whole but not in part, within 90 days of the occurrence of (a) a rating agency event at a redemption price equal to $25,500 per share of Preferred Stock (equivalent to $25.50 per depository share), plus unpaid dividends attributable to the current dividend period in circumstances where a rating agency changes its criteria used to assign equity credit to securities like the Preferred Stock; or (b) a regulatory capital event at a redemption price equal to $25,000 per share of Preferred Stock (equivalent to $25.00 per depository share), plus unpaid dividends attributable to the current dividend period in circumstances where a capital regulator such as a state insurance regulator changes or proposes to change capital adequacy rules. Share Repurchase Program On December 2, 2020, we announced that our Board authorized a $100 million share repurchase program, with no set expiration or termination date. Our repurchase program does not obligate us to acquire any particular amount of our common stock. Management will determine the timing and amount of any share repurchases under the authorization at its discretion based on market conditions and other considerations. For the year ended December 31, 2022, 165,159 shares were repurchased under the share repurchase program at a total cost of $12.4 million, including commissions. We had $84.2 million of remaining capacity under our share repurchase program as of December 31, 2022. 127 Note 18. Related Party Transactions William M. Rue, a Director of the Parent, is Chairman of, and owns more than 10% of the equity of Rue Holding Company, which owns 100% of Chas. E. Rue & Son, Inc., t/a Rue Insurance, a general independent retail insurance agency ("Rue Insurance"). Rue Insurance is an appointed distribution partner of the Insurance Subsidiaries on terms and conditions similar to those of our other distribution partners, which includes the right to participate in the Agent Plan. Mr. Rue’s son is President, and an employee, of Rue Insurance, and owns more than 10% of the equity of Rue Holding Company. Mr. Rue’s daughter is an employee of Rue Insurance and owns less than 10% of the equity of Rue Holding Company. Our relationship with Rue Insurance has existed since 1928. Rue Insurance placed insurance policies with the Insurance Subsidiaries for its customers and itself. Direct premiums written associated with these policies were $14.3 million in 2022, $12.8 million in 2021, and $11.0 million in 2020. In return, the Insurance Subsidiaries paid standard market commissions, including supplemental commissions, to Rue Insurance of $2.7 million in 2022, $2.0 million in 2021, and $1.8 million in 2020. Amounts due to Rue Insurance at December 31, 2022 and December 31, 2021 were $0.7 million and $0.7 million, respectively. All contracts and transactions with Rue Insurance were consummated in the ordinary course of business on an arm's-length basis. In 2005, we established a private foundation, now named The Selective Insurance Group Foundation (the "Foundation"), under Section 501(c)(3) of the Internal Revenue Code. The Board of the Foundation is comprised of some of the Parent's officers. We made $0.3 million of contributions to the Foundation in 2022, $1.3 million in 2021 and $0.5 million in 2020. BlackRock, Inc., a leading publicly-traded investment management firm (“BlackRock”), has purchased our common shares in the ordinary course of its investment business and has previously filed Schedules 13G/A with the SEC. On January 23, 2023, BlackRock filed a Schedule 13G/A reporting beneficial ownership as of December 31, 2022, of 11.8% of our common stock. In connection with purchasing our common shares, BlackRock filed the necessary filings with insurance regulatory authorities. On the basis of those filings, BlackRock is deemed not to be a controlling person for the purposes of applicable insurance law. We are required to disclose related party information for our transactions with BlackRock. BlackRock is highly regulated, serves its clients as a fiduciary, and has a diverse platform of active (alpha) and index (beta) investment strategies across asset classes that enables it to tailor investment outcomes and asset allocation solutions for clients. BlackRock also offers the BlackRock Solutions® investment and risk management technology platform, Aladdin®, risk analytics, advisory, and technology services and solutions to a broad base of institutional and wealth management investors. We incurred expenses related to BlackRock for services rendered of $1.8 million in 2022, $1.8 million in 2021, and $2.0 million in 2020. Amounts payable for such services were $0.8 million at December 31, 2022, $0.5 million at December 31, 2021, and $1.3 million at December 31, 2020. As part of our overall investment diversification, we invest in various BlackRock funds from time to time. These funds accounted for less than 1% of our invested assets at December 31, 2022 and December 31, 2021, and are predominately reflected in "Fixed income securities" on our Consolidated Balance Sheet. During 2022, with regard to BlackRock funds, we (i) purchased $18.5 million in securities, (ii) sold $32.3 million, (iii) recognized net realized and unrealized losses of $6.9 million, and (iv) recorded $1.8 million in income. During 2021, we (i) purchased $16.5 million in securities, (ii) sold $32.5 million, (iii) recognized net realized and unrealized losses of $0.6 million, and (iv) recorded $0.9 million in income. During 2020, we (i) purchased $62.2 million in securities, (ii) recognized net unrealized losses of $0.2 million, and (iii) recorded $0.4 million in income. We did not make any sales of BlackRock funds in 2020. There were no amounts payable on the settlement of these investment transactions at December 31, 2022 and December 31, 2021. Our Pension Plan's investment portfolio contained investments in BlackRock funds of $120.1 million at December 31, 2022 and $209.9 million at December 31, 2021. During 2022, with regard to BlackRock funds, the Pension Plan (i) purchased $56.4 million in securities, (ii) sold $65.7 million, and (iii) recorded net investment losses of $80.5 million. During 2021, with regard to BlackRock funds, the Pension Plan (i) purchased $18.0 million in securities, (ii) sold $18.1 million, and (iii) recorded net investment income of $18.2 million. During 2020, with regard to BlackRock funds, the Pension Plan (i) purchased $56.7 million in securities, (ii) sold $44.9 million, and (iii) recorded net investment income of $35.8 million. In addition, our Deferred Compensation Plan and Retirement Savings Plan may offer our employees the option to invest in various BlackRock funds. All contracts and transactions with BlackRock were consummated in the ordinary course of business on an arm's-length basis. Vanguard, one of the world’s largest investment management companies, has purchased our common shares in the ordinary course of its investment business and has previously filed Schedules 13G/A with the SEC. Vanguard offers low-cost mutual funds and exchange-traded funds, as well as other investment related services. On February 10, 2023, Vanguard filed a Schedule 13G/A reporting beneficial ownership of 10.03% of our common stock as of January 31, 2023. In connection with 128 purchasing our common shares, Vanguard filed the necessary filings with insurance regulatory authorities. On the basis of those filings, we do not expect Vanguard to be deemed a controlling person for the purposes of applicable insurance law. As part of our overall investment diversification, we may invest in various Vanguard funds from time to time. These funds accounted for less than 1% of our invested assets at December 31, 2022, and less than 3% of our invested assets at December 31, 2021, and are predominately reflected in "Equity securities" on our Consolidated Balance Sheet. During 2022, with regard to Vanguard funds, we (i) purchased $3.5 million in securities, (ii) sold $125.2 million, (iii) recognized net realized and unrealized losses of $10.4 million, and (iv) recorded $4.7 million in income. During 2021, we (i) purchased $19.3 million in securities, (ii) sold $23.6 million, (iii) recognized net realized and unrealized gains of $17.7 million, and (iv) recorded $7.5 million in income. During 2020, we (i) purchased $150.9 million in securities, (ii) recognized net realized and unrealized gains of $10.2 million, and (iii) recorded $2.4 million in income. We did not make any sales of Vanguard funds in 2020. There were no amounts payable on the settlement of these investment transactions at December 31, 2022 and December 31, 2021. Our deferred compensation plan offers our employees investment options based on the notional value of various Vanguard funds. Our defined contribution plan offers our employees the option to invest in a Vanguard fund. All transactions with Vanguard are consummated in the ordinary course of business on an arm’s-length basis. NOTE 19. Leases We have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases for computer hardware. Such lease agreements, which expire at various dates through 2032, are generally renewed or replaced by similar leases. The components of lease expense for the year ended December 31, 2022 and 2021 were as follows: ($ in thousands) Operating lease cost, included in Other insurance expenses on the Consolidated Statements of Income Finance lease cost: $ Amortization of assets, included in Other insurance expenses on the Consolidated Statements of Income Interest on lease liabilities, included in Interest expense on the Consolidated Statements of Income Total finance lease cost Variable lease cost, included in Other insurance expenses on the Consolidated Statements of Income Short-term lease cost, included in Other insurance expenses on the Consolidated Statements of Income $ 2022 2021 8,148 2,440 46 2,486 1,384 166 7,935 1,765 35 1,800 291 832 The following table provides supplemental information regarding our operating and finance leases. Weighted-average remaining lease term Operating leases Finance leases Weighted-average discount rate Operating leases Finance leases December 31, 2022 December 31, 2021 8 2 2.6 1.2 years 7 2 2.1 % 0.8 Operating and finance lease asset and liability balances are included within the following line items on the Consolidated Balance Sheets: ($ in thousands) Operating leases Other assets Other liabilities Finance leases Property and equipment - at cost, net of accumulated depreciation and amortization Long-term debt December 31, 2022 December 31, 2021 $ $ 42,403 44,505 3,713 3,718 35,644 37,296 5,446 5,450 129 The maturities of our lease liabilities at December 31, 2022 were as follows: ($ in thousands) Year ended December 31, 2023 2024 2025 2026 2027 Thereafter Total lease payments Less: imputed interest Less: leases that have not yet commenced Total lease liabilities Finance Leases Operating Leases Total $ $ 2,490 1,029 190 54 2 — 3,765 47 — 3,718 7,290 6,943 6,649 6,156 6,053 18,832 51,923 4,496 2,922 44,505 9,780 7,972 6,839 6,210 6,055 18,832 55,688 4,543 2,922 48,223 Refer to Note 4. "Statements of Cash Flows" in Item 8. "Financial Statements and Supplementary Data." of Form 10-K for supplemental cash and non-cash transactions included in the measurement of operating and finance lease liabilities. Note 20. Commitments and Contingencies (a) We purchase annuities from life insurance companies to fulfill obligations under claim settlements that provide for periodic future payments to claimants. As of December 31, 2022, we had purchased such annuities with a present value of $31.0 million for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material defaults from any of the issuers of such annuities. (b) As of December 31, 2022, we have made commitments that may require us to invest additional amounts into our investment portfolio, which are as follows: ($ in millions) Alternative investments Non-publicly traded collateralized loan obligations in our fixed income securities portfolio Non-publicly traded common stock within our equity portfolio CMLs Privately-placed corporate securities Total Amount of Obligation 246.1 106.6 35.0 4.9 20.1 412.7 $ $ There is no certainty that any such additional investment will be required. We expect to have the capacity to repay or refinance these obligations as they come due. Note 21. Litigation As of December 31, 2022, we do not believe we are involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. In the ordinary course of conducting business, we are parties in various legal actions. Most are claims litigation involving our Insurance Subsidiaries as (i) liability insurers defending or providing indemnity for third-party claims brought against our customers, (ii) insurers defending first-party coverage claims brought against them, or (iii) liability insurers seeking declaratory judgment on our insurance coverage obligations. We account for such activity by establishing unpaid loss and loss expense reserves. Considering potential losses and defense costs reserves, we expect that any potential ultimate liability for ordinary course claims litigation will not be material to our consolidated financial condition, results of operations, or cash flows. All our commercial property and businessowners' policies require direct physical loss of or damage to property by a covered cause of loss. All our standard lines commercial property and businessowners' policies also include or attach an exclusion that states all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss ("Virus Exclusion"). Whether COVID-19-related contamination, the existence of the COVID-19 pandemic, and the resulting COVID-19-related government shutdown orders cause physical loss of or damage to property is the subject of much public debate and first-party coverage litigation against some insurers, including us. The Virus Exclusion also is the subject of first-party coverage litigation against some insurers, including us. To date, insurers (including us) have prevailed in the majority of these suits, with most decisions holding that COVID-19 does not cause physical loss of or damage to property and the Virus Exclusion is valid. Nonetheless, 130 these two matters continue to be litigated in trial courts, are subject to review by state and federal appellate courts, and their ultimate outcome cannot be assured. From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some asserting claims for substantial amounts. Plaintiffs may style these actions as class actions and seek judicial certification of a state or national class for allegations involving our business practices, such as improper medical provider reimbursement under workers compensation and personal and commercial automobile insurance policies or improper reimbursement for automobile parts. Similarly, our Insurance Subsidiaries can be named defendants in individual actions seeking extra-contractual damages, punitive damages, or penalties, often alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these allegations and we account for such activity by establishing unpaid loss and loss expense reserves. Considering estimated losses and defense costs reserves, we expect that any potential ultimate liability for these other legal actions will not be material to our consolidated financial condition. As litigation outcomes are inherently unpredictable and the amounts sought in certain actions are large or indeterminate, adverse outcomes could potentially have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. Note 22. Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds (a) Statutory Financial Information The Insurance Subsidiaries prepare their statutory financial statements in accordance with accounting principles prescribed or permitted by the various state insurance departments of domicile. Prescribed statutory accounting principles include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (“NAIC"). Permitted statutory accounting principles encompass all accounting principles that are not prescribed; such principles differ from state to state, may differ from company to company within a state and may change in the future. The Insurance Subsidiaries do not utilize any permitted statutory accounting principles that affect the determination of statutory surplus, statutory net income, or risk-based capital (“RBC”). As of December 31, 2022, the various state insurance departments of domicile have adopted the March 2022 version of the NAIC Accounting Practices and Procedures manual in its entirety, as a component of prescribed or permitted practices. The following table provides statutory data for each of our Insurance Subsidiaries: State of Domicile Unassigned Surplus ($ in millions) SICA Selective Way Insurance Company ("SWIC") SICSC SICSE SICNY Selective Insurance Company of New England ("SICNE") Selective Auto Insurance Company of New Jersey ("SAICNJ") Mesa Underwriters Specialty Insurance Company ("MUSIC") Selective Casualty Insurance Company ("SCIC") Selective Fire and Casualty Insurance Company ("SFCIC") Total New Jersey New Jersey Indiana Indiana New York New Jersey New Jersey New Jersey New Jersey New Jersey 2022 $ 686.6 461.9 164.1 135.9 137.4 38.2 102.2 52.8 91.4 37.6 $ 1,908.1 2021 673.1 436.4 166.3 132.7 127.0 34.5 90.4 47.4 83.4 34.2 1,825.4 Statutory Surplus 2022 851.8 517.8 198.4 163.5 165.1 69.3 147.1 122.3 167.9 70.5 2,473.7 2021 838.3 492.4 200.6 160.3 154.7 65.6 135.2 116.9 159.9 67.1 2,391.0 2020 Statutory Net Income 2021 134.7 74.5 24.2 19.4 18.6 7.5 16.7 13.9 20.6 8.2 338.3 2022 103.1 69.6 17.0 14.2 13.2 5.1 12.7 9.7 14.0 5.8 264.4 81.8 54.0 20.8 16.8 15.3 6.8 12.9 11.4 16.2 6.4 242.4 (b) Capital Requirements The Insurance Subsidiaries are required to maintain certain minimum amounts of statutory surplus to satisfy the requirements of their various state insurance departments of domicile. RBC requirements for property and casualty insurance companies are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The Insurance Subsidiaries' combined total adjusted capital exceeded the required level of capital as defined by the NAIC based on their 2022 statutory financial statements. In the fourth quarter of 2020, the NAIC adopted the basic structure of Group Capital Calculation ("GCC"), along with a model law to enable the GCC after state legislative enactment. The GCC expands the existing RBC calculation to include (i) capital requirements for other regulated entities in the group, and (ii) defined capital calculation for other group entities that are unregulated. Our New Jersey state insurance regulators adopted the GCC model law in 2022. Based on our 2022 statutory financial statements, our GCC ratio exceeds the regulatory action minimum threshold. In addition to statutory capital requirements, we are impacted by various rating agency requirements related to certain rating levels. These required capital levels may be higher than statutory requirements. (c) Restrictions on Dividends and Transfers of Funds Our ability to declare and pay dividends on the Parent's common stock is dependent on liquidity at the Parent coupled with the 131 ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. In addition to regulatory restrictions on the availability of dividends that our Insurance Subsidiaries can pay to the Parent, the maximum amount of dividends the Parent can pay our shareholders is limited by certain New Jersey corporate law provisions that limit dividends if either: (i) the Parent would be unable to pay its debts as they became due in the usual course of business; or (ii) the Parent’s total assets would be less than its total liabilities. The Parent’s ability to pay dividends to shareholders also are impacted by (i) covenants in its Line of Credit that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period. As of December 31, 2022, the Parent had an aggregate of $484.3 million in investments and cash available to fund future dividends and interest payments. These amounts are not subject to any regulatory restrictions other than the standard state insolvency restrictions noted above, whereas our consolidated retained earnings of $2.7 billion are predominately restricted due to regulations applicable to our Insurance Subsidiaries. In 2023, the Insurance Subsidiaries have the ability to provide for $283.1 million in annual dividends to the Parent; however, as regulated entities, these dividends are subject to certain restrictions, which are further discussed below. The Parent also has other potential sources of liquidity, such as: (i) borrowings from our Indiana Subsidiaries; (ii) debt issuances; (iii) common and preferred stock issuances; and (iv) borrowings under our Line of Credit. Borrowings from our Indiana Subsidiaries are governed by approved intercompany lending agreements with the Parent that provide for additional capacity of $121.5 million as of December 31, 2022, based on restrictions in these agreements that limit borrowings to 10% of the admitted assets of the Indiana Subsidiaries. For additional restrictions on the Parent's debt, see Note 11. "Indebtedness" in this Form 10-K. Insurance Subsidiaries Dividend Restrictions As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries' ability to pay dividends to the Parent under applicable laws and regulations. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income (excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend calculation is consistent with New Jersey's, except that it does not exclude capital gains from net income. In general, New York defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net investment income. New Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the notice period, the relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the dividend is not appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend payments exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable domiciliary insurance regulatory authority prior to payment. 132 The table below provides the following information: (i) quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in 2022, which was used for debt service, shareholder dividends, and general operating purposes; and (ii) the maximum ordinary dividends that can be paid to the Parent by the Insurance Subsidiaries in 2023, based on the 2022 statutory financial statements. Dividends ($ in millions) SICA SWIC SICSC SICSE SICNY SICNE SAICNJ MUSIC SCIC SFCIC Total State of Domicile Twelve Months ended December 31, 2022 Ordinary Dividends Paid 2023 Maximum Ordinary Dividends New Jersey New Jersey Indiana Indiana New York New Jersey New Jersey New Jersey New Jersey New Jersey $ $ 62.3 $ 24.3 5.6 6.6 3.0 1.5 1.3 5.3 7.8 2.3 120.0 $ 103.1 69.6 19.8 16.4 16.5 6.9 14.7 12.2 16.8 7.1 283.1 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act; and (ii) effective in ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by, or under the supervision of, a company's principal executive and principal financial officers and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • • • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework ("COSO Framework") in 2013. Based on this assessment, our management believes that, as of December 31, 2022, our internal control over financial reporting is effective. No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, our internal 133 control over financial reporting. Attestation Report of the Independent Registered Public Accounting Firm Our independent registered public accounting firm, KPMG, LLP, has issued their attestation report on our internal control over financial reporting which is set forth below. Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Selective Insurance Group, Inc.: Opinion on Internal Control Over Financial Reporting We have audited Selective Insurance Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and December 31, 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules I to V (collectively, the consolidated financial statements), and our report dated February 10, 2023 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. New York, New York February 10, 2023 /s/ KPMG LLP 134 Item 9B. Other Information. Not applicable. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. PART III Because we will file a Proxy Statement within 120 days after the end of the fiscal year ending December 31, 2022, this Annual Report on Form 10-K omits certain information required by Part III and incorporates by reference certain information included in the Proxy Statement. Item 10. Directors, Executive Officers and Corporate Governance. Information about our executive officers, directors, and all other matters required to be disclosed in Item 10. "Directors, Executive Officers and Corporate Governance." appears under the "Executive Officers," "Information About Proposal 1 - Election of Directors," and "Board Meetings and Committees" sections of the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference. Item 11. Executive Compensation. Information about compensation of our named executive officers appears under the "Executive Compensation," including, without limitation, the Compensation Discussion and Analysis and related tabular disclosures, the "CEO Pay Ratio," "Pay versus Performance," and the "Compensation Committee Report" sections of the Proxy Statement and is hereby incorporated by reference. Information about compensation of the Board appears under the "Director Compensation" section of the Proxy Statement and is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information about security ownership of certain beneficial owners and management appears under the "Security Ownership of Management and Certain Beneficial Owners" section of the Proxy Statement and is hereby incorporated by reference. Information about securities authorized for issuance under the Company’s equity compensation plans is set forth under Item 5. "Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities." in this Form 10-K and is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. Information about certain relationships and related transactions, and director independence appears under “Transactions with Related Persons” section of the Proxy Statement and is hereby incorporated by reference. Item 14. Principal Accountant Fees and Services. Information about the fees and services of our principal accountants, KPMG LLC (Public Company Accounting Oversight Board ID No. 185), appears under the "Fees of Independent Registered Public Accounting Firm" section of the Proxy Statement and is hereby incorporated by reference. 135 PART IV Item 15. Exhibit and Financial Statement Schedules. (a) The following documents are filed as part of this report: (1) Financial Statements: The Financial Statements listed below are included in Item 8. "Financial Statements and Supplementary Data." Consolidated Balance Sheets as of December 31, 2022 and 2021 Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020 Notes to Consolidated Financial Statements, December 31, 2022, 2021, and 2020 (2) Financial Statement Schedules: Form 10-K Page 75 76 77 78 79 80 The financial statement schedules, with Independent Auditors' Report thereon, required to be filed are listed below by page number as filed in this report. All other schedules are omitted as the information required is inapplicable, immaterial, or the information is presented in the Financial Statements or related notes. Schedule I Summary of Investments – Other than Investments in Related Parties at December 31, 2022 Schedule II Condensed Financial Information of Registrant at December 31, 2022, 2021, and 2020 and for the Years Ended December 31, 2022, 2021, and 2020 Schedule III Supplementary Insurance Information for the Years Ended December 31, 2022, 2021, and 2020 Schedule IV Reinsurance for the Years Ended December 31, 2022, 2021, and 2020 Schedule V Allowance for Credit Losses on Premiums and Other Receivables for the Years Ended December 31, 2022, 2021, and 2020 Form 10-K Page 137 138 141 142 142 (3) Exhibits: The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated by reference and immediately precedes the exhibits filed with or incorporated by reference in this Form 10-K. 136 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2022 SCHEDULE I Types of investment ($ in thousands) Fixed income securities: Held-to-maturity: Amortized Cost or Cost Fair Value Carrying Amount Obligations of states and political subdivisions $ Public utilities All other corporate securities Total fixed income securities, held-to-maturity Available-for-sale: U.S. government and government agencies Foreign government Obligations of states and political subdivisions Public utilities All other corporate securities Collateralized loan obligation securities and other asset-backed securities Residential mortgage-backed securities Commercial mortgage-backed securities Total fixed income securities, available-for-sale Equity securities: Common stock: Banks, trusts and insurance companies Industrial, miscellaneous and all other Nonredeemable preferred stock Total equity securities Commercial mortgage loans Short-term investments Alternative investments Other investments Total investments 3,405 — 26,432 29,837 189,239 9,608 918,018 97,717 2,237,308 1,485,973 1,059,832 614,412 6,612,107 20,201 140,154 1,645 162,000 3,405 — 27,752 31,157 209,528 11,199 965,231 110,544 2,448,111 1,607,660 1,169,546 663,935 7,185,754 22,579 142,892 1,960 167,431 149,305 440,439 371,316 71,244 $ 8,045,330 3,405 — 27,752 31,157 189,239 9,608 918,018 97,717 2,237,308 1,485,973 1,059,832 614,412 6,612,107 20,201 140,154 1,645 162,000 149,189 440,456 371,316 71,244 7,837,469 See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K 137 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Balance Sheets ($ in thousands, except share amounts) Assets: Fixed income securities, available-for-sale – at fair value (allowance for credit losses: $1,194 – 2022; $542 – 2021; amortized cost: $418,588 – 2022; $317,703 – 2021 $ Equity securities Short-term investments Alternative investments Cash Investment in subsidiaries Current federal income tax Deferred federal income tax Other assets Total assets Liabilities: Long-term debt Intercompany notes payable Accrued long-term stock compensation Other liabilities Total liabilities Stockholders’ Equity: Preferred stock of $0 par value per share: Authorized shares: 5,000,000; Issued shares: 8,000 with $25,000 liquidation preference per share – 2022 and 2021 Common stock of $2 par value per share: Authorized shares: 360,000,000 Issued: 104,847,111 – 2022; 104,450,916 – 2021 Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Treasury stock – at cost (shares: 44,508,211 – 2022; 44,266,534 – 2021) Total stockholders’ equity Total liabilities and stockholders’ equity $ $ $ $ $ SCHEDULE II December 31, 2022 2021 387,535 48,095 33,008 15,631 26 325,014 136,362 56,042 9,241 455 2,524,448 2,954,725 8,894 14,733 11,104 7,208 4,487 9,178 3,043,474 3,502,712 440,958 56,266 11,101 7,585 515,910 440,600 57,980 10,965 10,282 519,827 200,000 200,000 209,694 493,488 2,749,703 (498,042) (627,279) 2,527,564 3,043,474 208,902 464,347 2,603,472 115,099 (608,935) 2,982,885 3,502,712 See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 138 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Statements of Income SCHEDULE II (continued) ($ in thousands) Revenues: Dividends from subsidiaries Net investment income earned Net realized and unrealized investment (losses) gains $ Total revenues Expenses: Interest expense Other expenses Total expenses Income before federal income tax Federal income tax (benefit) expense: Current Deferred Total federal income tax benefit Year ended December 31, 2022 2021 2020 120,007 18,622 (17,855) 120,774 28,897 31,116 60,013 60,761 (9,381) (2,189) (11,570) 140,018 15,454 1,898 157,370 28,988 28,305 57,293 100,077 (6,552) 12 (6,540) 104,992 7,579 1,756 114,327 29,220 25,412 54,632 59,695 (10,987) 473 (10,514) Net income before equity in undistributed income of subsidiaries 72,331 106,617 70,209 Equity in undistributed income of subsidiaries, net of tax 152,555 297,220 176,146 Net income Preferred stock dividends Net income available to common stockholders $ $ 224,886 403,837 246,355 9,200 9,353 — 215,686 394,484 246,355 See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 139 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Statements of Cash Flows SCHEDULE II (continued) ($ in thousands) Operating Activities: Net income Year ended December 31, 2022 2021 2020 $ 224,886 403,837 246,355 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed income of subsidiaries, net of tax (152,555) (297,220) (176,146) Stock-based compensation expense Net realized and unrealized investment losses (gains) Undistributed (income) losses of equity method investments Amortization – other Changes in assets and liabilities: Increase (decrease) in accrued long-term stock compensation (Increase) decrease in net federal income taxes Increase in other assets Decrease in other liabilities Net cash provided by operating activities Investing Activities: Purchases of fixed income securities, available-for-sale Purchases of equity securities Purchases of short-term investments Purchases of alternative investments Redemption and maturities of fixed income securities, available-for-sale Sales of fixed income securities, available-for-sale Sales of equity securities Sales of short-term investments Proceeds from alternative investments Capital contribution to subsidiaries Net cash used in investing activities Financing Activities: Dividends to preferred stockholders Dividends to common stockholders Acquisition of treasury stock Proceeds from borrowings Repayment of borrowings Net proceeds from stock purchase and compensation plans Preferred stock issued, net of issuance costs Principal payment on borrowings from subsidiaries Net cash (used in) provided by financing activities Net (decrease) increase in cash Cash, beginning of year Cash, end of year $ 18,428 17,855 (2,240) (154) 136 (3,875) (1,961) (2,813) 97,707 (208,512) (1,647) (362,213) (4,149) 35,527 66,725 77,971 385,254 — — (11,044) (9,200) (66,920) (18,344) — — 9,086 — (1,714) (87,092) (429) 455 26 15,893 (1,898) (1,859) 1,076 2,727 3,843 (7,251) (1,742) 117,406 (113,829) (5,676) (330,843) (4,949) 51,524 15,713 31,204 311,225 959 — (44,672) (9,353) (60,136) (9,050) — — 7,976 (479) (1,631) (72,673) 61 394 455 16,227 (1,756) 672 1,080 (366) 5,549 (317) (390) 90,908 (89,726) (157,411) (523,961) (4,065) 26,877 23,276 — 523,813 — (30,000) (231,197) — (54,486) (7,053) 50,000 (50,000) 8,411 195,063 (1,552) 140,383 94 300 394 See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 140 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION Year ended December 31, 2022 SCHEDULE III Deferred policy acquisition costs Reserve for loss and loss expense Unearned premiums Net premiums earned Net investment income1 Loss and loss expense incurred Amortization of deferred policy acquisition costs Other operating expenses2 Net premiums written 2,901,984 319,059 352,547 — 3,573,590 400,313 (11,335) 388,978 ($ in thousands) Standard Commercial Lines Segment Standard Personal Lines Segment E&S Lines Segment Investments Segment $ 311,535 17,817 39,272 — 4,275,002 340,302 529,517 — 1,511,447 322,668 158,666 — 2,739,819 299,405 334,156 — — — — 173,347 1,683,988 231,113 196,677 — 605,845 27,129 72,848 — 306,290 48,356 34,332 — Total 388,978 1Includes “Net investment income earned” and “Net realized and unrealized investment (losses) gains” on the Consolidated Statements of Income. 2“Other operating expenses” of $388,978 reconciles to the Consolidated Statements of Income as follows: $ 368,624 3,373,380 1,992,781 5,144,821 2,111,778 173,347 705,822 Other insurance expenses Other income Total $ $ See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Year ended December 31, 2021 Other Unearned operating expenses2 ($ in thousands) premiums Standard Commercial Lines Segment 1,346,809 278,915 Standard Personal Lines Segment 317,276 51,559 E&S Lines Segment 139,122 27,734 Investments Segment — — Total 1,803,207 358,208 1Includes “Net investment income earned” and “Net realized and unrealized investment (losses) gains” on the Consolidated Statements of Income. 2“Other operating expenses” of $358,208 reconciles to the Consolidated Statements of Income as follows: Net premiums earned 2,443,885 293,559 279,809 — 3,017,253 — — — 344,188 344,188 Net investment income1 Deferred policy acquisition costs $ 279,850 12,911 34,154 — $ 326,915 Loss and loss expense incurred 1,426,768 212,116 175,100 — 1,813,984 Reserve for loss and loss expense 3,832,151 270,066 478,686 — 4,580,903 Amortization of deferred policy acquisition costs 539,606 25,918 60,945 — 626,469 Other insurance expenses Other income Total $ $ Net premiums written 2,593,018 292,265 304,430 — 3,189,713 375,931 (17,723) 358,208 See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Year ended December 31, 2020 Deferred policy acquisition costs $ 246,494 13,803 28,281 — Reserve for loss and loss expense 3,596,340 228,348 435,667 — Unearned premiums 1,196,243 308,183 113,845 — Net premiums earned 2,143,184 299,140 239,490 — Net investment income1 — — — 222,890 Loss and loss expense incurred 1,245,627 233,260 156,936 — Amortization of deferred policy acquisition costs 474,322 30,694 55,255 — Other operating expenses2 271,504 50,694 27,173 — ($ in thousands) Standard Commercial Lines Segment Standard Personal Lines Segment E&S Lines Segment Investments Segment Total 1,618,271 349,371 1Includes “Net investment income earned” and “Net realized and unrealized investment (losses) gains” on the Consolidated Statements of Income. 2“Other operating expenses” of $349,371 reconciles to the Consolidated Statements of Income as follows: $ 288,578 4,260,355 2,681,814 1,635,823 560,271 222,890 Other insurance expenses Other income Total $ $ Net premiums written 2,230,636 295,166 247,290 — 2,773,092 366,941 (17,570) 349,371 See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 141 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES REINSURANCE Years ended December 31, 2022, 2021, and 2020 SCHEDULE IV ($ thousands) 2022 Premiums earned: Accident and health insurance Property and liability insurance Total premiums earned 2021 Premiums earned: Accident and health insurance Property and liability insurance Total premiums earned 2020 Premiums earned: Accident and health insurance Property and liability insurance Total premiums earned Direct Amount Assumed from Other Companies Ceded to Other Companies Net Amount % of Amount Assumed to Net $ $ $ — 3,880,522 3,880,522 2 3,472,713 3,472,715 13 3,108,674 3,108,687 — 30,742 30,742 — 21,550 21,550 — 25,010 25,010 — 537,884 537,884 — 3,373,380 3,373,380 2 477,010 477,012 — 3,017,253 3,017,253 13 451,870 451,883 — 2,681,814 2,681,814 — 1 % 1 % — 1 % 1 % — 1 % 1 % See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. SCHEDULE V SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES ALLOWANCE FOR CREDIT LOSSES ON PREMIUMS AND OTHER RECEIVABLES Years ended December 31, 2022, 2021, and 2020 ($ in thousands) Balance, January Cumulative effect adjustment Balance at the beginning of the period, as adjusted Additions Deductions Balance, December 31 2022 2021 2020 $ $ 15,200 — 15,200 7,478 (4,978) 17,700 22,777 — 22,777 1,766 (9,343) 15,200 10,800 (1,845) 8,955 17,576 (3,754) 22,777 See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 142 EXHIBIT INDEX Exhibit Number 3.1 3.2 3.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Amended and Restated Certificate of Incorporation of Selective Insurance Group, Inc., filed May 4, 2010, as amended by Certificate of Correction thereto, dated August 17, 2020 and effective May 4, 2010 (incorporated by reference herein to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed October 29, 2020, File No. 001-33067). Certificate of Amendment of the Restated Certificate of Incorporation of Selective Insurance Group, Inc., with respect to the 4.60% Non-Cumulative Preferred Stock, Series B of Selective Insurance Group, Inc., filed with the State of New Jersey Department of Treasury and effective December 7, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A, filed December 8, 2020, File No. 001-33067). By-Laws of Selective Insurance Group, Inc., effective July 29, 2015 (incorporated by reference herein to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, filed July 30, 2015, File No. 001-33067). Indenture, dated as of September 24, 2002, between Selective Insurance Group, Inc. and National City Bank, as Trustee, relating to the Company's 1.6155% Senior Convertible Notes due September 24, 2032 (incorporated by reference herein to Exhibit 4.1 of the Company's Registration Statement on Form S-3, filed November 26, 2002 File No. 333-101489). Indenture, dated as of November 16, 2004, between Selective Insurance Group, Inc. and Wachovia Bank, National Association, as Trustee, relating to the Company's 7.25% Senior Notes due 2034 (incorporated by reference herein to Exhibit 4.1 of the Company's Current Report on Form 8-K, filed November 18, 2004, File No. 000-08641). Indenture, dated as of November 3, 2005, between Selective Insurance Group, Inc. and Wachovia Bank, National Association, as Trustee, relating to the Company’s 6.70% Senior Notes due 2035 (incorporated by reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed November 9, 2005, File No. 000-08641). Indenture, dated as of February 8, 2013, between Selective Insurance Group, Inc. and U.S. Bank National Association, as Trustee (incorporated by reference herein to Exhibit 4.1 of the Company's Current Report on Form 8-K, filed February 8, 2013, File No. 001-33067). Second Supplemental Indenture, dated as of March 1, 2019 between Selective Insurance Group, Inc. and U.S. Bank National Association, as Trustee, relating to the Company’s 5.375% Senior Notes due 2049 (incorporated by reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed March 1, 2019 File No. 001-33067). Deposit Agreement, dated as of December 9, 2020, among the Company and Equiniti Trust Company, acting as Depositary, Registrar and Transfer Agent, and the holders from time to time of the depositary receipts described therein (incorporated by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K, filed December 9, 2020, File No. 001-33067). Description of the Company's Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as amended (incorporated by reference herein to Exhibit 4.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed February 12, 2021, File No. 001-33067). 10.1+ Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective January 1, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed October 31, 2008, File No. 001-33067). 143 Exhibit Number 10.1a+ 10.1b+ 10.2+ 10.2a+ 10.2b+ 10.3+ 10.4+ 10.5+ 10.6+ 10.7+ 10.8+ 10.9+ 10.10+ 10.11+ Amendment No. 1 to Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective January 1, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company's Current Report on Form 8- K, filed March 25, 2013, File No. 001-33067). Amendment No. 2 to Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective January 1, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed May 5, 2020, File No. 001-33067). Selective Insurance Company of America Deferred Compensation Plan (2005), As Amended and Restated Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed October 27, 2011, File No. 001-33067). Amendment No 1. to Selective Insurance Company of America Deferred Compensation Plan (2005) (incorporated by reference herein to Exhibit 10.2a of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed October 27, 2011, File No. 001-33067). Amendment No. 2 to Selective Insurance Company of America Deferred Compensation Plan (2005), As Amended and Restated Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the Company's Current Report on Form 8-K, filed March 25, 2013, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan, effective May 1, 2014 (incorporated by reference herein to Appendix A-1 to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, filed April 3, 2014, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Director Stock Option Agreement (incorporated by reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Stock Option Agreement (incorporated by reference herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Service-Based Restricted Stock Agreement (incorporated by reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Performance-Based Restricted Stock Agreement (incorporated by reference herein to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Service-Based Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Performance-Based Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Director Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As Amended and Restated Effective as of May 1, 2010 (incorporated by reference herein to Appendix C of the Company’s Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders, filed March 25, 2010, File No. 001-33067). 144 Exhibit Number 10.12+ 10.13+ Selective Insurance Group, Inc. 2014 Omnibus Stock Plan as Amended and Restated Effective as of May 2, 2018 (incorporated by reference herein to Appendix A of the Company’s Definitive Proxy Statement for its 2018 Annual Meeting of Stockholders, filed March 26, 2018, File No. 001-33067). Selective Insurance Group, Inc. Non-Employee Directors’ Compensation and Deferral Plan, As Amended and Restated Effective as of January 1, 2017 (incorporated by reference herein to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016, filed February 22, 2017, File No. 001-33067). 10.14+ (P) Deferred Compensation Plan for Directors (incorporated by reference herein to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993, File No. 000-08641). 10.15+ 10.16+ 10.17+ 10.18+ 10.19+ 10.20+ 10.21+ 10.22+ 10.23+ 10.24+ 10.25+ Selective Insurance Group, Inc. Employee Stock Purchase Plan (2021), Amended and Restated Effective July 1, 2021 (incorporated by reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, filed April 29, 2021, File No. 001-33067). Selective Insurance Group, Inc. Cash Incentive Plan As Amended and Restated as of May 1, 2014 (incorporated by reference herein to Appendix B to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, filed March 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. Cash Incentive Plan Service-Based Cash Incentive Unit Award Agreement (incorporated by reference herein to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. Cash Incentive Plan Performance-Based Cash Incentive Unit Award Agreement (incorporated by reference herein to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067). Amended and Restated Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance Agencies (2010), Amended and Restated as of November 1, 2020 (incorporated by reference herein to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed October 29, 2020, File No. 001-33067). Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, (incorporated by reference herein to Exhibit A of the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, filed March 31, 2000, File No. 000-08641). Amendment to Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, as amended (incorporated by reference herein to Exhibit 10.22a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed February 27, 2009, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Gregory E. Murphy, effective as of February 1, 2020 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed November 1, 2019, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and John J. Marchioni, dated as of February 10, 2020 (incorporated by reference herein to Exhibit 10.32 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed February 12, 2020, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Mark A. Wilcox, dated as of October 28, 2016 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8- K, filed October 31, 2016, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Michael H. Lanza, dated as of March 2, 2020 (incorporated by reference herein to Exhibit 10.1 of the Company's Current Report on Form 8-K, filed March 2, 2020, File No. 001-33067). 145 Exhibit Number 10.26+ 10.27+ 10.28+ 10.29 10.30 10.31+ 10.32+ Employment Agreement between Selective Insurance Company of America and Brenda M. Hall, dated as of September 30, 2019 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10- Q for the quarter ended September 30, 2021, filed October 28, 2021, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Paul Kush, dated as of December 5, 2019 (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, filed October 28, 2021, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Vincent M. Senia, dated as of June 6, 2017 (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, filed October 28, 2021, File No. 001-33067). Credit Agreement among Selective Insurance Group, Inc., the Lenders Named Therein and Bank of Montreal, Chicago Branch, as Administrative Agent, dated as of December 20, 2019 (incorporated by reference herein to Exhibit 10.34 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed February 12, 2020, File No. 001-33067). Form of Indemnification Agreement between Selective Insurance Group, Inc. and each of its directors and executive officers, as adopted on May 19, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed May 20, 2005, File No. 000-08641). Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.27 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed February 24, 2010, File No. 001-33067). Amendment No. 1 to the Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.27a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed February 25, 2011, File No. 001-33067). 146 Exhibit Number *21 *23.1 *24.1 *24.2 *24.3 *24.4 *24.5 *24.6 *24.7 *24.8 *24.9 *24.10 *24.11 *24.12 *24.13 *24.14 *24.15 *31.1 *31.2 **32.1 **32.2 *99.1 ** 101 Subsidiaries of Selective Insurance Group, Inc. Consent of KPMG LLP. Power of Attorney of Ainar D. Aijala, Jr. Power of Attorney of Lisa Rojas Bacus. Power of Attorney of John C. Burville. Power of Attorney of Terrence W. Cavanaugh. Power of Attorney of Wole C. Coaxum. Power of Attorney of Robert Kelly Doherty. Power of Attorney of Thomas A. McCarthy. Power of Attorney of Stephen C. Mills. Power of Attorney of H. Elizabeth Mitchell. Power of Attorney of Michael J. Morrissey. Power of Attorney of Cynthia S. Nicholson. Power of Attorney of William M. Rue. Power of Attorney of John S. Scheid. Power of Attorney of J. Brian Thebault. Power of Attorney of Philip H. Urban. Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. Glossary of Terms. The following financial statements from the Company's Annual report on Form 10-K for the year ended December 31, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (II) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. ** 104 The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2022, formatted in iXBRL. * Filed herewith. ** Furnished and not filed herewith. + Management compensation plan or arrangement. (P) Paper filed. Item 16. Form 10-K Summary. None. 147 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SELECTIVE INSURANCE GROUP, INC. By: /s/ John J. Marchioni John J. Marchioni Chairperson of the Board, President and Chief Executive Officer (principal executive officer) By: /s/ Mark A. Wilcox Mark A. Wilcox Executive Vice President and Chief Financial Officer (principal financial officer) By: /s/ Anthony D. Harnett Anthony D. Harnett Senior Vice President and Chief Accounting Officer (principal accounting officer) February 10, 2023 February 10, 2023 February 10, 2023 148 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. By: /s/ John J. Marchioni John J. Marchioni Chairperson of the Board, President and Chief Executive Officer * Ainar D. Aijala, Jr. Director * Lisa Rojas Bacus Director * John C. Burville Director * Terrence W. Cavanaugh Director * Wole C. Coaxum Director * Robert Kelly Doherty Director * Thomas A. McCarthy Director * Stephen C. Mills Director * H. Elizabeth Mitchell Director * Michael J. Morrissey Director * Cynthia S. Nicholson Director * William M. Rue Director * John S. Scheid Director * J. Brian Thebault Director * Philip H. Urban Director * By: /s/ Michael H. Lanza Michael H. Lanza Attorney-in-fact 149 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 February 10, 2023 Glossary of Terms Accident Year: accident year reporting focuses on the cost of the losses that occurred in a given year regardless of when reported. These losses are calculated by adding all payments that have been made for those losses occurring in a given calendar year (regardless of the year in which they were paid) to any current reserve that remains for losses that occurred in that given calendar year. Agent (Independent Retail Insurance Agent): a distribution partner who recommends and markets insurance to individuals and businesses; usually represents several insurance companies. Insurance companies pay agents for business production. Allocated loss expenses: defense, litigation, and medical cost containment expense, whether internal or external. Audit Premium: premiums based on data from an insured’s records, such as payroll data. Insured’s records are subject to periodic audit for purposes of verifying premium amounts. Book Value per Common Share: an expression of the value of an entity per outstanding common share, which is calculated by dividing common stockholders’ equity by the number of common shares outstanding as of a specified date. This metric is used by both investors and us in evaluating the financial strength of our company. Catastrophe Loss: severe loss, as defined by the Insurance Services Office's Property Claims Service (PCS) unit, either natural or man-made, usually involving, but not limited to, many risks from one occurrence such as fire, hurricane, tornado, earthquake, windstorm, explosion, hail, severe winter weather, and terrorism. Combined Ratio: measure of underwriting profitability determined by dividing the sum of all GAAP expenses (losses, loss expenses, underwriting expenses, and dividends to policyholders) by GAAP net premiums earned for the period. A ratio over 100% is indicative of an underwriting loss, and a ratio below 100% is indicative of an underwriting profit. Credit Risk: risk that a financially-obligated party will default on any type of debt by failing to make payment obligations. Examples include: (i) a bond issuer does not make a payment on a coupon or principal payment when due; or (ii) a reinsurer does not pay policy obligations. Credit Spread: represents the risk premium required by market participants for a given credit quality and debt issuer. Spread is the difference between the yield on a particular debt instrument and the yield of a similar maturity U.S. Treasury debt security. Changes in credit spreads may arise from changes in economic conditions and perceived risk of default or downgrade of individual debt issuers. Customers: another term for policyholders; individuals or entities that purchase our insurance products or services. Diluted Weighted Average Common Shares Outstanding: represents weighted-average common shares outstanding adjusted for the impact of any dilutive common stock equivalents. Direct New Business: premiums for all new policies sold directly by the insurance subsidiaries during a specific accounting period, without consideration given to reinsurance activities. Distribution Partners: insurance consultants that we partner with in selling our insurance products and services. Independent retail insurance agents are our distribution partners for standard market business and wholesale general agents are our distribution partners for E&S market business. Exhibit 99.1 Invested Assets per Dollar of Common Stockholders' Equity Ratio: measure of investment leverage calculated by dividing invested assets by common stockholders' equity. Liquidity Spread: represents the risk premium that flows to a market participant willing to provide liquidity to another market participant that is demanding it. The spread is the difference between the price a seller is willing to accept to sell the asset and the price the buyer is willing to pay for the asset. Loss Expenses: expenses incurred in the process of evaluating, defending, and paying claims. Loss and Loss Expense Reserves: amount of money an insurer expects to pay for claim obligations and related expenses resulting from losses that have occurred and are covered by insurance policies it has sold. Loss Trend: represents increases or decreases to losses incurred relative to underlying exposures over time and is typically expressed as a percentage relative to the loss ratio. Various factors influence loss trend and can affect claims frequency and severity. These factors include, but are not limited to, legislative enactments, judicial decisions, changes in societal behavior as well as economic and social inflation. Loss trend may be historical, which we estimate based on our historical loss experience, or future, which we estimate using our loss experience supplemented with forward-looking indicators. Net Premiums Written to Statutory Surplus Ratio: statutory measure of solvency risk calculated by dividing net statutory premiums written for the year by the ending statutory surplus. Non-Catastrophe Property Losses: Losses and loss expenses incurred that are attributable to property coverages that we have written throughout our lines of business, but exclude any such amounts that are related to catastrophe losses. Non-GAAP Operating Income: non-GAAP measure that is comparable to net income available to common stockholders with the exclusion of after-tax net realized and unrealized gains and losses on investments, and after-tax debt retirement costs. Non-GAAP operating income is used as an important financial measure by us, analysts, and investors, because the realization of investment gains and losses on sales of securities in any given period is largely discretionary as to timing. In addition, net realized and unrealized investment gains and losses on investments that are charged to earnings and the debt retirement costs could distort the analysis of trends. Non-GAAP Operating Income per Diluted Common Share: non-GAAP measure that is comparable to net income available to common stockholders per diluted common share with the exclusion of after-tax net realized and unrealized gains and losses on investments, and after-tax debt retirement costs. Non-GAAP Operating Return on Common Equity: measurement of profitability that reveals the amount of non-GAAP operating income generated by dividing non-GAAP operating income by average common stockholders’ equity during the period. Reinsurance: insurance company assuming all or part of a risk undertaken by another insurance company. Reinsurance spreads the risk among insurance companies to reduce the impact of losses on individual companies. Types of reinsurance include proportional, excess of loss, treaty, and facultative. Earned Premiums: portion of a premium that is recognized as income based on the expired portion of the policy period. Premiums Written: premiums for all policies sold during a specific accounting period. Effective Duration: expressed in years, provides an approximate measure of the portfolio's price sensitivity to a change in interest rates, taking into consideration how the change in interest rates may impact the timing of expected cash flows. Frequency: a measure of the rate at which claims occur that is generally calculated by dividing the number of claims by a measure of exposure, such as earned premium or earned exposure units. Prior Year Casualty Reserve Development: Loss reserve development is the increase or decrease in incurred loss and loss expenses as a result of the re-estimation of these amounts at successive valuation dates. Prior year casualty reserve development is casualty loss reserve development related to prior accident years. Renewal Pure Price: estimated average premium change on renewal policies (excludes all significant exposure changes). Generally Accepted Accounting Principles (GAAP): accounting practices used in the United States of America determined by the Financial Accounting Standards Board. Public companies use GAAP when preparing financial statements to be filed with the United States Securities and Exchange Commission. Incurred But Not Reported (IBNR) Reserves: reserves for estimated losses that have been incurred by insureds but not yet reported plus provisions for future emergence on known claims and reopened claims. Interest Rate Risk: exposure to interest rate risk relates primarily to market price and cash flow variability associated with changes in interest rates. A rise in interest rates may decrease the fair value of our existing fixed income security investments and declines in interest rates may result in an increase in the fair value of our existing fixed income security investments. Retention: measures how well an insurance company retains business. Retention is expressed as a ratio of renewed over expired business, based on aggregate line of business coverages provided to our customers. Return on Common Equity: measure of profitability that is calculated by dividing net income available to common stockholders by average common stockholders' equity during the period. Risk: two distinct and frequently used meanings in insurance: (i) the chance that a claim loss will occur; or (ii) an insured or the property covered by a policy. Exhibit 99.1 Glossary of Terms Severity: a measure of the average cost of claims that provides an indication of the amount of damage that is, or may be, inflicted by a loss. Severity is calculated by dividing loss and loss expenses incurred by the number of claims. Statutory Accounting Principles (SAP): accounting practices prescribed and required by the National Association of Insurance Commissioners (“NAIC”) and state insurance departments that stress evaluation of a company’s solvency. Statutory Surplus: amount left after an insurance company’s liabilities are subtracted from its assets. Statutory surplus is not based on GAAP, but SAP prescribed or permitted by state and foreign insurance regulators. Unallocated loss expenses: loss adjustment expenses other than allocated loss adjustment expenses. Underwriting: insurer’s process of reviewing applications submitted for insurance coverage, deciding whether to provide all or part of the coverage requested, and determining applicable premiums and terms and conditions of coverage. Underwriting Result: underwriting income or loss; represents premiums earned less insurance losses and loss expenses, underwriting expenses, and dividends to policyholders. This measure of performance is used by management and analysts to evaluate profitability of underwriting operations and is not intended to replace GAAP net income. Unearned Premiums: portion of a premium that a company has written but has yet to earn because a portion of the policy is unexpired. Wholesale General Agent: distribution partner authorized to underwrite on behalf of a surplus lines insurer through binding authority agreements. Insurance companies pay wholesale general agents for business production. Yield on Investments: Yield is the income earned on an investment, expressed as an annual percentage rate that is calculated by dividing income earned by the average invested asset balance. Yield can be calculated based on either pre-tax or after-tax income and can be calculated on the entire investment portfolio, or on a portion thereof, such as the fixed income securities portfolio. This page intentionally left blank 2022 BOARD OF DIRECTORS H. Elizabeth Mitchell 2018 Former President and Chief Executive Officer, Renaissance Reinsurance U.S., Inc. Michael J. Morrissey, CFA 2008* Special Advisor and former President and Chief Executive Officer, International Insurance Society, Inc. Cynthia (Cie) S. Nicholson 2009 Managing Member, Band of Sisters, LLC William M. Rue 1977* Chairman, Chas. E. Rue & Son, Inc., t/a Rue Insurance John S. Scheid, CPA 2014 Owner, Scheid Investment Group, LLC, and former Senior Partner, PricewaterhouseCoopers LLP J. Brian Thebault 1996 Partner, Thebault Associates Philip H. Urban 2014 Former President and Chief Executive Officer, Grange Insurance John J. Marchioni 2019 Chairman of the Board, President and Chief Executive Officer, Selective Insurance Group, Inc. Ainar D. Aijala, Jr. 2020 Former Senior Advisor, Deloitte & Touche LLP Lisa Rojas Bacus 2020 Former Executive Vice President and Global Chief Marketing Officer, Cigna Corporation John C. Burville, Ph.D, FIA, MAAA 2006* Former Insurance Consultant to the Bermuda Government Terrence W. Cavanaugh 2018 Founding Partner, Accretive Consulting LLC, and former President and Chief Executive Officer, Erie Indemnity Company Wole C. Coaxum 2020 Chief Executive Officer, Mobility Capital Finance (MoCaFi) Robert Kelly Doherty 2015 Lead Independent Director, Selective Insurance Group, Inc. Managing Partner, Caymen Partners Thomas A. McCarthy 2018 Former Executive Vice President and Chief Financial Officer, Cigna Corporation Stephen C. Mills 2020 Former President and General Manager, New York Knicks *Retiring 2023 SELECTIVE 2022 ANNUAL REPORT 51326_Selective AR Wrap 2022 - v2.indd 7 3/9/23 4:37 PM Thomas S. Purnell 2 Regional Manager Northeast Region Erik A. Reidenbach 2 Regional Manager Heartland Region Nathan C. Rugge 2 Actuarial Reserving Brian C. Sarisky 2 Chief Underwriting Officer Commercial Lines Valerie Sparks 2 Regional Manager West Region Robyn P. Turner 1 Assistant General Counsel and Corporate Secretary OFFICERS Chairman of the Board President and Chief Executive Officer John J. Marchioni 1,2 Executive Vice Presidents Lucinda (Cyndi) Bennett 2 Chief Human Resources Officer John P. Bresney 2 Chief Information Officer Joseph O. Eppers 1,2 Chief Investment Officer Brenda M. Hall 2 Chief Operating Officer Standard Lines Jeffrey F. Kamrowski 2 MUSIC Paul Kush 2 Chief Claims Officer Michael H. Lanza 1,2 General Counsel and Chief Compliance Officer Rohit Mull 2 Chief Marketing and Innovation Officer Vincent M. Senia 2 Chief Actuary Mark A. Wilcox 1,2 Chief Financial Officer 1 Selective Insurance Group, Inc. 2 Selective Insurance Company of America Senior Vice Presidents Charles C. Adams 2 Regional Manager Mid-Atlantic Region Allen H. Anderson 2 Chief Underwriting Officer Personal Lines Jeffrey F. Beck 2 Government and Regulatory Affairs Teresa M. Caro 2 Regional Manager New Jersey Region Sarita G. Chakravarthi 1,2 Tax and Assistant Treasurer Christopher G. Cunniff 1,2 Chief Risk Officer Kevin P. Forrey 2 Enterprise Delivery Services Anthony D. Harnett 1,2 Chief Accounting Officer Todd Hoivik 2 Commercial Lines Pricing and Research Martin Hollander 1,2 Chief Audit Executive Robert J. McKenna, Jr. 2 Enterprise Strategy and Execution Ryan T. Miller 2 Regional Manager Southern Region Maria Orecchio 2 Deputy General Counsel Rohan Pai 1,2 Investor Relations and Treasurer 51326_Selective AR Wrap 2022 - v2.indd 8 3/9/23 4:37 PM INVESTOR INFORMATION Annual Meeting Wednesday, May 3, 2023 - 9:00 AM (ET) Virtual format via live audiocast at www.virtualshareholdermeeting.com/SIGI2023 Executive Office 40 Wantage Avenue Branchville, New Jersey 07890 (973) 948.3000 Investor Relations Rohan Pai Senior Vice President Investor Relations and Treasurer (973) 948.1364 Investor.Relations@Selective.com Dividend Reinvestment Plan Selective Insurance Group, Inc. makes available to holders of its common stock an automatic dividend reinvestment and stock purchase plan. For information contact: EQ Shareowner Services P.O. Box 64854 St. Paul, Minnesota 55164 (866) 877.6351 Registrar and Transfer Agent EQ Shareowner Services P.O. Box 64854 St. Paul, Minnesota 55164 (866) 877.6351 Auditors KPMG LLP 345 Park Avenue New York, New York 10154 Internal Audit Department Martin Hollander Senior Vice President Chief Audit Executive Internal.Audit@Selective.com Shareholder Relations Selective will provide by mail, free of charge, a copy of its Annual Report on Form 10-K for the year ended December 31, 2022 (not including exhibits and documents incorporated by reference), the Proxy Statement for the 2023 Annual Meeting, and the annual report and proxy materials for future Annual Meetings (once available) at your request. Please direct all requests to: Robyn P. Turner Senior Vice President Assistant General Counsel and Corporate Secretary (973) 948.1766 Shareholder.Relations@Selective.com Common Stock Information Selective Insurance Group, Inc.’s common stock trades on the Nasdaq Global Select Market under the symbol: SIGI. Form 10-K Selective’s Form 10-K, as ﬁled with the U.S. Securities and Exchange Commission, is provided as part of this 2022 Annual Report. Website Visit us at www.Selective.com for information about Selective, including our latest ﬁnancial news. 51326_Selective AR Cover 2022 - v2.indd 6 3/10/23 2:03 PM SELECTIVE 2022 ANNUAL REPORT S E L E C T I V E A N N U A L R E P O R T 2 0 2 2 0 9 w J e rs e y 0 7 8 e e • B ra n c h ville, N u n e A v e a nta g 0 W 4 51326_Selective AR Cover 2022 - v2.indd 1 3/10/23 2:03 PM

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